Economist Paul Krugman recently suggested that the US Treasury should print a $1 trillion coin to avert the debt ceiling crisis. However, I must strongly disagree with his proposal.
Krugman’s idea is based on the belief that creating new money does not lead to inflation. But it is simple math that increasing the money supply leads to price inflation. This is because the value of money is tied to the amount of goods and services produced in the economy. When the money supply increases faster than the production of goods and services, the result is inflation.
Krugman argues that the US could sell an equivalent amount in US bonds to negate the impact of printing new money, but this is simply shifting the problem around. It doesn’t change the fact that printing new money devalues the existing money supply.
Furthermore, the idea that the Federal Reserve could sell off some of its holdings to sterilize the impact on the monetary base is flawed. The Fed’s holdings of US debt are already at record levels, and selling them off could trigger a bond market collapse and a financial crisis.
Krugman also suggests the US could create new “premium bonds” to raise capital without impacting the money supply, but this would not solve the problem either. Selling bonds, regardless of the type, still increases the amount of debt the US has to service, which ultimately puts a strain on taxpayers.
The bottom line is that there is no free lunch when it comes to printing new money. It is a short-term solution that only creates more problems in the long run. The US government should instead focus on reducing spending and balancing the budget to avoid the debt ceiling crisis altogether.