- Mark Zandi said a $1 trillion coin may be legal but is an unrealistic fix to the debt crisis.
- The law authorizing platinum coins had commemorative coins in mind, the Moody's chief economist said.
Moody Analytics chief economist Mark Zandi rejected the idea of a $1 trillion coin as a serious solution to avoiding a US debt default.
In a written testimony for a Senate hearing on the debt limit, he said federal law gives the US Treasury authority to mint platinum coins. But the law had commemorative coins in mind, not "circumventing Congress' power of the purse," Zandi said.
"Proposed workarounds to the debt limit, like minting a $1 trillion platinum coin, would be unworkable," he wrote.
The $1 trillion coin has come up during previous standoffs, when Republicans in Congress refused to lift the debt ceiling unless a Democratic administration agreed to deep spending cuts.
The never-tried-before concept would take advantage of a loophole in currency law, allowing the US to mint platinum coins of any face value.
The Treasury would then deposit it at the Federal Reserve and use the money to pay US debt obligations and stave off default — without Congress lifting the debt ceiling. But Zandi said such a move would come with grave consequences for the central bank.
"This would also put the Fed in the middle of the battle, badly politicizing it, and thus significantly jeopardizing its independence, which is critical to a well-functioning economy," he wrote.
His written remarks echo those of Treasury Secretary Janet Yellen, who previously dismissed the idea of a $1 trillion coin.
"It truly is not by any means to be taken as a given that the Fed would do it, and I think especially with something that's a gimmick," she told the Wall Street Journal in January. "The Fed is not required to accept it, there's no requirement on the part of the Fed. It's up to them what to do."
Meanwhile, the Treasury has already reached the $31.4 trillion debt limit, and is able to use extraordinary measures to continue meeting its obligations. But by mid-summer, those tools are expected to be exhausted, setting up a potentially catastrophic default.
If no resolution is reached, markets would likely crash while millions could lose their jobs. Zandi said the resulting economic downturn would be on par with what happened after 2008 global financial crisis.
"Treasury yields, mortgage rates, and other consumer and corporate borrowing rates would spike, at least until the debt limit is resolved and Treasury payments resume," he said. "Even then, rates would not fall back to where they were previously. And the economy's long-term growth prospects will be materially diminished."
Zandi also doubted other debt-ceiling workarounds. For example, he also brought up Section 4 of the 14th Amendment, which says the nation must pay its debts.
That could be viable "if push comes to shove," but the law was passed after the Civil War to prevent the federal government from paying Confederate debts.
"Investors would rightly wonder if using the 14th Amendment to abrogate the debt limit law would stand up in the courts, and even if so, what it means for our political system's checks and balances," he added. "Given the constitutional crisis this would set off, financial markets would still be roiled, and a recession ensue."