Sunday, January 6, 2013

There is No Platinum Bullet


But there is plenty of Gold ::

Here are my recently edited Google+ comments on, “Hey, let’s avoid the debt-ceiling standoff by minting a trillion-dollar platinum coin instead.

Yeah, let's borrow another trillion dollars, and then use it to buy a trillion dollars worth of platinum. Then we can mint it into a gigantic non-marketable, non-negotiable coin, deposit it into the Treasury, and use it as collateral for the cost of buying the Platinum and minting it into a gigantic coin. That sounds like a real winner, eh? Yeah, it’s a dumb idea, and not even possible since there isn’t a trillion dollars worth of platinum lying around anywhere for the taking.

On the practical side, why not just take the 261,498,900 troy ounces of Gold sitting in the Treasury, which is something the federal government already owns, then sell it all for $433 billion? This would raise $422 billion net, since the government would first have to redeem the gold certificates held by the FRB for $11 billion, which the gold currently stands as collateral. Then we can use the proceeds to cover 40% of this year's budget deficit. Once this has been accomplished, then next year we can _ _   _ _ _ _   _ _ _ _ _ _ _ _ _ (you fill in the blanks).

One of the commenter’s admitted that the idea was crazy, but then went on to say that he thinks eliminating the debt ceiling is a good idea. His reasoning was that the government is constitutionally mandated to pay its debts, or something. To this I replied, “You just said the government has to pay its debts, and then said there should be no debt ceiling because the government must pay its debts. So how is the federal government’s act of continuing to borrow more on an unlimited basis synonymous with paying its debts?” He continued to repeat the same foolishness without stopping to try to understand my point, so my interest in the conversation waned.

My creditors have extended to me credit within certain limits. If I exceed those limits I will be forced to pay a penalty, and the extension of credit will cease. If I don't bring the debt balance below the limit quickly enough, my accounts may be closed at the lenders discretion. Even an unlimited credit line has an implied limit. That is the point at which the debtor can no longer reasonably make principal and interest payments while meeting its basic obligations.

Having worked in the past as a corporate credit manager, I can state that when extending credit, one of the considerations is whether the debtor has enough annual income to cover principal and interest payments on all of its outstanding debt, while at the same time being able to cover its basic obligations. Using the same logic, it doesn’t take a degree in accounting or finance to understand that the U.S. government is already well beyond this capability. It is not setting aside monies to pay its debt principal, and is in fact not making principal payments at all. It is basically continuing to borrow more in order to meet its basic obligations, including the interest it pays on the debt.

Like it or not, the U.S. government has an implied credit limit, which has already been surpassed. It is currently borrowing to meet its basic obligations including interest paid on its "interest only" credit line. At this point, if the federal government were to raise income tax rates by 50% on everyone, it still wouldn’t be enough to cover principal and interest payments and to meet its basic obligations. To get there, on its current trajectory, would take better than a 100% across-the-board tax hike. Until the federal government balances its budget, there’s really nothing to look forward to or even discuss.

When creditors stop issuing credit, or begin to demand higher interest rates to compensate for the risk of default, that's when the house of cards comes crashing down. When it comes to the federal debt, there is no platinum bullet. This government must either cut spending dramatically, or raise taxes by more than 100% across-the-board, it’s either that or face extinction.

Related: Solving the Debt Crisis | A Catch-22; From AAA to AA- in Four Years

Photo Via: The Most Expensive Journal

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