There are few political systems in the world filled with more poorly conceived contrivances than the United States. While this fact may lend itself well to entertaining political theatre it also gives elected representatives ample ammunition to continually bring the country to the brink of collapse.

Over the Christmas vacation, Congress managed to narrowly avoid going over the ’fiscal cliff’. In the process, congressmen had to work through New Year’s Eve until 2am. Expletives were shouted from one party to another, and the Republican Party dissolved due to a lack of solidarity under the leadership of the Speaker of the House, John Boehner (only to re-elect him a few days later). While the fiscal cliff deadline was admirable in the sense that it forced some type of resolution on the contentious issue, the result was merely a two month extension to the deadline and a public discontented with their infantile representatives. Not ideal for the world’s largest and most powerful economy.

The latest crisis the US Government finds itself in is that of the ’debt ceiling‘, another piece of legislation designed to hold legislators accountable for their spending. The debt ceiling places an upper bound on the amount of money the US Government, in the form of the Federal Reserve, can borrow to finance its activities. On the face of it this seems like reasonable legislation but it is the Congressional Budget (a totally separate entity) which mandates how much the government will spend that year. What point is there in writing obligations into law if another law states that you can’t raise the money to pay for such obligations?

Traditionally two outcomes to the debt ceiling have been considered in the debate: firstly, raise the debt ceiling or secondly, breach the ceiling and shut down government until it is subsequently raised. Either way the obligations written into law are met.

Recently people have started talking about minting a ’trillion dollar coin’ as a possible workaround for the debt ceiling. It sounds bizarre, the technicalities are bizarre and the responses from the media, economists and politicians have been bizarre. The idea rests upon an accounting sleight of hand, although one that is frequently used with smaller denominations.

A brief introduction to how the government finances are managed in the United States is needed. The Federal Reserve System is in charge of monetary policy (the printing of paper currency and holding the US public debt). The United States Department of the Treasury is responsible for fiscal policy (the minting of coinage, authorising the Federal Reserve to print paper currency and the issuance of debt). Typically when the Treasury needs to pay for obligations the Federal Reserve purchases debt from it, but the debt ceiling means that the Federal Reserve is now at the limit of how much it can purchase.

The solution is for the Treasury to mint a coin to the denomination it desires, deposit it in the Federal Reserve in exchange for US bonds and so lower the nominal value of the US debt on the Federal Reserve’s balance sheet such that it can purchase more under the debt ceiling. Once the debt ceiling is raised, the bonds can be returned to the Reserve and the coin returned to the Treasury where it will be destroyed.

The accounting is complex but the implications are not. Common arguments against this idea are ones invoking the worry of an extra trillion dollars being injected into the economy as though money were being printed and causing hyperinflation. Fortunately this isn’t quite the case as all the coin is doing is allowing the government debt to expand normally as though no debt ceiling existed; it’s not actually increasing the money supply. Inflation is the increase in money supply for a fixed number of goods and services; in this case the money supply is increasing in direct proportion to the increase in goods and services so there isn’t really a cause for inflation.

A second worry, expressed by the Republican Party, is about how much platinum would be needed to mint a trillion dollar coin – apparently 20 tons if the value of platinum was to match the face value of the coin.  Those who share this concern misunderstand the basic workings of our currency system: the concept of seigniorage, i.e. that there may be a difference between the value of money and the cost to produce and distribute it. A twenty pound note clearly doesn’t have twenty pounds worth of paper and ink in it.

The former argument is being put forward by the media and some economists; the latter is being used by some politicians. It is worrying that elected officials and those responsible for advising and informing them have such a poor grasp of the modern concept of currency. Whilst this may be a silly solution what is more worrying is the growing inefficacy of Washington caused by ill-informed legislators who are now bearing the consequences of their own actions.