The reason that the debt ceiling puts the President in such a predicament is the confusing way in which power is divided between Congress and the President. Congress sets the budget, if this involves a shortfall of tax revenue relative to public expenditure, then the President is forced to borrow the difference. What makes this situation different from other countries is that Congress also has the power to limit the amount of debt the country can have. As this level approaches, they put pressure on the President to halt the levels of borrowing, created by their budgets. The President could stop borrowing past the amount Congress needs to implement its budget, but this would result in the Government spending money which it has not been financed. This would have dramatic consequences for the US and global economy, especially with regards to confidence in the dollar as a means of payment, which would be extremely dangerous for global stability and consequently has never been allowed to occur. This raises the question - for what reason does the Debt Ceiling actually exist? Part of the reason is that Congress benefits from creating a problem that only it can solve, allowing it to use the threat of economic destabilisation as leverage to fight against any changes in Government spending or taxation that it opposes.
As for the so called deficit hawks in Congress Obama may reason that they are not in fact deficit hawks at all. Many of the Republicans demanding that the Government deficit be reduced were supportive of the previous President quickly turning large surpluses into deficits with tax cuts to the wealthy and massive military outlay, which together, according to estimates from the Congressional Budget Office, account for a staggering $600 billion of the current deficit today. To put this in perspective according the Office’s estimates by 2019, if current policies are sustained, almost 50% of the total government debt will be accounted for by these two Republican policies. The economic downturn instigated by the burst of the housing bubble along with the failure of adequate recovery measures that attempted to fill the substantial hole in total spending left by the private sector, account for the majority of the current deficit. Clearly in principle therefore Republicans have no problem with sustained deficits. A more appropriate term for them would perhaps be Spending hawks or Welfare hawks, who use self-created deficits to demand the current President cut programs they deem to have no value, these being mainly welfare and health provision which the GOP have wrongly claimed are the main reason for the current deficit.
Because of these frustrations, discussion in some quarters has turned to how the President could get around the obstacles set before him by Congress. One idea was to use the constitution that protects US debt to simply ignore the deficit limit - wanting to avoid all the legal entanglements that this would involve Obama has refuted this option. Next was the infamous “trillion dollar coin” suggestion. Queue the right-wing comedy. ‘How about a twenty trillion dollar coin or even a 100 trillion dollar coin?’ was a common question amongst critics. Stephen Colbert provided probably the wittiest gag: "we should have known a coin was Obama's solution to everything - it was right there in his slogan: CHANGE”. Meanwhile news stations have kept themselves equally amused with clips Dr. Evil and Homer Simpson with a trillion dollar note.
Moving onto the serious discussion of the logistics of the plan Fox News reported that the amount of platinum needed would sink any boat used to transport it as it would weigh 17,774 tons or using their alternative unit of measurement - 89 blue whales! This clearly ignores the simple fact that there is no more reason for the coin to actually be worth one trillion dollars than the paper used to make a $20 note actually be worth $20. Meanwhile those who tried to sound more serious stated that the coin would create massive levels of inflation and destroy the value of the dollar, comparisons with the hyperinflation of Zimbabwe Dollars were especially popular. All this served to prove the point that those hired to inform the rest of us have little understanding of money creation or even basic economics. Economic theory states that in certain conditions, i.e. with depressed demand and interest rates unable to fall any lower, an increase in the money supply does not lead to inflation. Banks today create trillions of dollars by the simple act of lending, which has had very little inflationary effect, as evidenced by the rates of inflation in the US as well as other advanced nations with a highly developed banking industry. In fact in the UK, around 97% of the total money supply has been created by the financial sector and not the Bank of England.
Putting it simply, the creation of more money is not the alien concept it has been made to seem and is only inflationary under certain conditions. But even this misunderstands the central concept of the coin. The one trillion dollars credited to the treasury would be offset by selling assets or borrowing from banks so that borrowing would continue as normal. In other words this is just an accounting trick. This is not an economic solution to the debt in the longer term. Instead it is aimed to get around the political problem of the debt limit set by Congress. As the fiscal cliff showed us by claiming several points of GDP growth, political problems have economic consequences which explains the enthusiasm of some to avoid yet another messy and costly round of negotiations.
Therefore what has been revealed by this round of debt ceiling talks is that the majority of people influencing the debate in Washington either do not understand the concepts discussed or do not want to engage in serious debate about the role of money and debt in the economy. Perhaps before the next round of negotiations begins, this issue should be addressed.