Trillion dollar coin - where are we going?

It is the end of the week and the fact that some are thinking about a trillion dollar coin as a solution to the debt ceiling makes one wonder where we are really going with debt discussions. Without a complete review, the issue is very simple. The US Treasury has the ability to mint coins in any denomination. The trillion coin is booked at the Fed and the funds are transferred to the Treasury. After the debt limit is raised the Treasury will sell bonds and then take the proceed to buy back the trillion dollar coin in exchange for Treasury debt. The Treasury acts this way now if there are new coins minted.

If there is a constraint on the amount of debt that can be issued and held by the public, then you have to monetize your liabilities through some other method. If you can go directly to the central bank and have them issue dollars, then you can pay bills with the fresh dollars. The dollar liabilities from the central bank is offset by holding a trillion dollar coin as an asset. The accounting works, but you will be deflating the currency.Talk about monetizing the debt!

The debt ceiling has to be raised to allow for new debt, but it does not seem unreasonable to ask for some spending constraints in exchange for allow a debt hike. Sure this debt ceiling level can be viewed as pure fiction, but it provides some means to constrain on spending.