The return of the one trillion-dollar coin in recent news is sparked by the upcoming debt ceiling decision put in congress’ hands which may come due as early as 1 June – due to the lower-than-expected tax receipts that came in this April. For a concept that was birthed “just for the lulz” (Meet the Genius Behind the Trillion-Dollar Coin and the Plot to Breach the Debt Ceiling | WIRED) it sure has gotten traction and will most likely resurface every time the US is deciding whether to raise the debt ceiling or not because well, who doesn’t like talking about one trillion-dollars?
Politics aside, the underlying question here is not whether it will work to pay off the US’ upcoming debt payments (which it will because it is literally printing money) but whether the risk of even higher inflation is worth it, especially given the current economic climate of recovering post Covid – wherein the Federal Reserve (FED) didn’t just print 1 trillion dollars but 3 trillion dollars in order for the US economy to avoid going into a grinding halt. However, even if quantitative easing (QE) is something that has worked for the US post Global Financial Crisis which led to one of the longest bull runs in US stock market history while successfully keeping inflation at bay since actual inflation remained relatively low during that period. In fact, inflation was well below the FED’s target of 2% in the years following the financial crisis. The increase in the monetary base resulting from QE did not translate into a significant increase in the money supply or inflation because banks largely held on to the reserves instead of lending them out. Additionally, the sluggish economic recovery during that time period may have contributed to the low inflation environment.
This time around though the money that was printed by the United States during the COVID-19 pandemic went towards a variety of measures aimed at mitigating the economic impact of the pandemic. Specifically, the US government implemented several relief programs, such as stimulus checks, expanded unemployment benefits, small business loans, and support for state and local governments. Additionally, the Federal Reserve implemented a series of measures, such as buying bonds and providing loans to businesses and local governments, to help keep credit flowing through the economy.
Another factor to take into consideration in determining the outcome of QE as mentioned by FED in its newsletter entitled: Quantitative Easing Explained, is market expectations. The general public’s perception of future inflation plays a crucial role as it drives their spending decisions today. If the public believes that the increase in the monetary base from QE is temporary, then they may not expect inflation to rise significantly in the near future. These expectations can influence actual pricing behavior and, ultimately, actual inflation. Therefore, the credibility of the Federal Reserve is a crucial factor in the success of its monetary policy. So yeah, if the US public trusts both its commercial and central bank, then minting that one trillion-dollar coin may be worth it.