Obama Blinks: No Emperor's New Coin

By Bill Freezza

It looks like the American people have been cheated out of a precious teachable moment. Demonstrating their ability to think two moves ahead, something their Republican opponents seem incapable of, the Democratic leadership has decided to stop dancing around the threat to issue a trillion-dollar coin. The Treasury Department, Saturday, finally issued a flat out denial.

Pity. Daring them to do it would have been the perfect tool to demonstrate that the emperor has no clothes.

Any American who is not terrified of the mess created by the Federal Reserve, the Too-Big-to-Fail banks, Washington’s insatiable spending binge, and the unprecedented money printing intended to keep the illusion alive that this can continue forever is, quite simply, impervious to facts and reason. These are probably the same people who believe there really is a Social Security “lock box” or that every dollar spent by government really creates two dollars in economic growth.

Picture what would have gone through their heads watching the President of the United States, live on TV, ascend the steps of the Federal Reserve bearing a satin pillow with a trillion dollar platinum coin on top. As he deposits the coin, he turns to the cameras and says, “Fear not, fellow Americans. By depositing this mighty coin we have created enough money to pay for all the free stuff we promised you for at least another year.”

What?

At that moment, even the most innumerate Paul Krugman devotee would have been forced to face the fact that the value of the dollar rests on a mere illusion. That illusion is sustained by nothing other than the power of Congress to confiscate wealth from the productive elements of society and pass it out to the unproductive. Were that coin—which might as well be a pile of magic beans—to come into existence, it would prove that that power has been crippled.

Call it gridlock, call it checks and balances, or call it the saving grace of a broken democracy. The only thing that will bring our country back from the brink of ruin is acknowledging reality, a precondition for forcing the clowns in Washington to live within our means.

Are you aghast at the spectacle Congress has made of itself? You should be. Worried that foreign investors who witness another messy fight over the debt ceiling will stop lending Uncle Sam money? For all our sakes, let’s hope they cut us off if we don’t have the brains to stop mortgaging our future.

Ask yourself, how are we ever supposed to climb out of this hole if we don’t stop digging? Won’t this cause interest rates to rise? They’d better if we want to save our economy from another destructive malinvestment bubble—not to mention preserve some shred of value in the dollar itself.

Consider the political calculus as this tragicomedy plays out. The White House played a cat-and-mouse game with the trillion-dollar coin idea for a week, neither endorsing nor repudiating it. The president’s proxies took to the airwaves threatening House Republicans—give us all the taxes and spending we want and raise the debt ceiling to the sky or we’re really going to do this! Republicans responded by running around like chickens with their heads cut off, introducing bills to prevent such an abomination. As a result, they accomplished two things: handed Obama negotiating leverage and set themselves up for another PR drubbing.

The correct response to the coin threat would have been to say, “Go ahead, make my day!” The instant those words are spoken Obama’s negotiating leverage vanishes. And this is exactly the position any responsible congressman should take as other sketchy dodges, like printing IOUs, are trotted out to give the president a plan B should he not get his way.

If the Republican Party has any hope of maintaining relevance within our dysfunctional two party system it needs to become an immovable object anchored around a single proposition: Either the president gets serious about genuine spending cuts and entitlement reforms or Congress cuts up his credit card. 

Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist.