Thursday, in his last interview as president of the U.S., Barack Obama fielded a question from a group of his former speech writers, whose startup Crooked Media launched a (very funny) politics podcast called Pod Save America in early January: "When were you most scared in the White House? What was your scariest moment?"
Obama responded that it was the near-default in January 2013, the proximal cause of which was House Republicans' reluctance to raise the debt ceiling and allow the Treasury to keep up with its bond payments (House Republicans would retort that the ultimate cause was government spending). "We had to start drafting the speech," Obama said.
Defaulting on Treasury bonds could potentially be catastrophic, but no one is sure exactly what would happen because, as Obama pointed out, it has "never happened before." Treasury rates are used a proxy for the theoretical risk-free rate of return, which ultimately forms the basis on which markets price all kinds of securities, from stocks to bonds to mortgages to the most complex derivatives. If the government defaulted, it would mean that Treasury obligations were no longer "risk-free" investments – or close enough – and the globe would undergo a chaotic, bruising exercise in price discovery that might not end well for anyone.
Faced with this prospect, Obama and his team talked options. Like a trillion-dollar coin, for example.
"There were all kinds of wacky ideas about how potentially you could have this massive coin – I mean it was like some primitive, some, you know it was like out of the Stone Age or something. And I pictured rolling some coin – for those who are listening it gets pretty technical, but there was this theory that I had the authority to just issue through the mint – I could just issue this massive, trillion-dollar coin – a commemorative coin – and then on that basis we could try to pay off U.S. Treasuries. And it was a very realistic possibility that we couldn't get the votes for that and we couldn't get those debts rolled over, and we would be in a situation where technically we were in default. And at that point you were in uncharted territory."
Obama was only half-joking when he said "it gets pretty technical." The idea of a trillion-dollar coin, which generated a media firestorm in early 2013, arguably has some legal footing. The Treasury produces the United States' currency, both bills and coins. At the cash register, there is no difference between paper and metal denominations – except perhaps convenience. Between the Treasury Secretary's office and the consumer's pocket, however, there is a strange legal gulf between notes and coins, which opens up the possibility of a trillion-dollar platinum coin.
The Mint, an agency within the Treasury, produces coins. The Bureau of Engraving and Printing, a separate agency within the Treasury, produces the Treasury securities and paper money – which are essentially zero-yielding Treasuries – that the Federal Reserve takes onto its balance sheet and distributes to commercial banks through its regional branches. The Fed also distributes coins, but unlike paper money and Treasuries, these show up on its balance sheet as assets, not liabilities. (See also, The Federal Reserve: Introduction.)
As a result, the Obama administration could have minted a trillion-dollar commemorative coin using this obscure, handy law (U.S. Code title 31, section 5112(k)):
"The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time."
It could have taken (or rolled) that coin down the street to the Fed, deposited it, and created a trillion-dollar credit in the Treasury's account at the central bank. That would have brought the debt down to around $15.7 trillion, creating enough wiggle room beneath the debt ceiling for the Treasury to pay the interest it owed its lenders. The national debt currently stands at just shy of $20.0 trillion.
Of course, given that this move would be unprecedented and profoundly controversial, Obama brought the legal team in.
"And what was also true was that – in addition to talking to Jack Lew, the Treasury Secretary, and my speech writers about a speech – there were also questions about whether any actions that I took might be violations of the law, and so we had to be talking to lawyers about potential challenges and legal actions and lawsuits from bondholders around the world.
Perhaps even more important than the legal questions, which would have taken years to fully hash out, were the market implications of the trillion-dollar commemorative coin, which would have been instant. If a default could upset global markets, so could waving a magic wand at the debt. The money the government creates through a complicated dance between the Federal Reserve and the Treasury has no inherent value. It is based on trust that the Treasury will make good on its word. The bizarre ritual of tossing a platinum – yes it has to be platinum – coin into the Fed's vaults might not technically constitute a default, but many of the government's lenders would probably not care about the difference. (See also, Understanding How the Federal Reserve Creates Money.)
The debt ceiling, at $18.1 trillion, has been overshot by nearly $2 trillion, but it's been suspended until March 2017. Four or eight years from now, President Trump may confide in a circle of colleagues that his scariest night in the White House came soon after his inauguration, when he and (probably) Steve Mnuchin furtively discussed the idea of minting a $2-or-so trillion platinum coin and his speechwriters prepared to tell the world that the U.S. would default on its debts.