Maybe we are just over thinking this whole fiscal cliff thing. Why not just print the money the government wants to spend and not worry about borrowing it? What could be economically problematic about that? That is the gist of a rather trite story published on The Washington Post’s Wonkblog this afternoon. Not a very new idea, but this time the idea came with a twist: instead of actually printing the money we’ll make platinum coins and just say they worth a trillion each.

Thanks to an odd loophole in current law, the U.S. Treasury is technically allowed to mint as many coins made of platinum as it wants and can assign them whatever value it pleases. Under this scenario, the U.S. Mint would produce (say) a pair of trillion-dollar platinum coins. The president orders the coins to be deposited at the Federal Reserve. The Fed then moves this money into Treasury’s accounts. And just like that, Treasury suddenly has an extra $2 trillion to pay off its obligations for the next two years — without needing to issue new debt. The ceiling is no longer an issue.

As even the article author admits, while this is apparently legal, it is utterly insane.

Thankfully, few are seriously proposing this (other than Yale law professor Jack Balkin), but there are plenty of individuals who do think we can print our way out of this fiscal mess. And that is why what followed in the WaPost story was so disturbing:

“I like [the platinum coin idea],” says Joseph Gagnon of the Peterson Institute for International Economics. “There’s nothing that’s obviously economically problematic about it.”

In theory, this is much like having the central bank print money. But, says Gagnon, the U.S. government would simply be using the money to keep spending at existing levels, so it wouldn’t create any extra inflation. And if it did cause problems, the Fed could always counteract the effects by winding down some of its other programs to inject money into the economy.

Uh, no. Actually, there is an obvious economic problem with this.

Here is how things work now: When the government borrows money, it is transferring dollars from private investors to other private vendors by buying goods and services and paying federal workers. Treasury issues a bond, taking money out of the economy by borrowing, but then puts it right back through federal spending (promising to pay the loan off with tax revenues in the future).

However, if government decides it magically has $2 trillion worth of coins (that just happen to be made ofplatinum) this would immediately create $2 trillion worth of inflation. The coins would be deposited at the Fed, into the Treasury Department’s account to spend. Money has been created out of thin air here, backed by nothing but arbitrarily denominated coins. The government buys goods and services with this money, and pays federal workers with it (as usual). But in this hypothetical scenario the government is not borrowing any money any more (because it has the money to spend), so the investors who would have loaned that $2 trillion to the government by buying Treasury bonds will have to use that money elsewhere in the economy. This means money has been printed and spent, while the $2 trillion that would have been borrowed and used in its place continues to exist. Simply put, that is going to be inflationary.

Perhaps Dr. Gagnon (who has more than two decades at the Federal Reserve and Treasury Department) does not fear the inflation that would result from $2 trillion more being printed and sent into circulation. But he would be sorely mistaken if so. Where quantitative easing has injected hundreds of billions into bank balance sheets (where it has largely remained, thus having only indirect inflationary impact by driving up stock and commodities prices), this coin plan would drop all that new money in circulation right into Main St., driving up prices for everyone.

It’s obviously problematic.