I’m not a trained economist, and in fact my worst grade in college was in economics (much to my parent’s chagrin). But even I understand that the concept of money is the concept of value. This is also why Wingnuttia has such an obsession with hard currency, but I digress.
Let’s say that you build a house and it costs you $10,000 to do so (this house clearly is not in California); you live in it for a while and during that time many people are born, and some of them want to own their own homes. You decide to sell your house, and you note with some satisfaction that houses in your non-California neighborhood are selling for $100,000. You sell your house and pocket a cool $90,000 profit. Congratulations!
Now let’s say you are the person buying the house. You agree that it is worth $100,000. You go to the bank to arrange a loan. You’ve been industrious and good, and you’ve saved $20,000 for the down payment. The bank likes you, likes your prospects and loans you the remainder, and lo! you’ve bought a house. Congratulations!
The bank did not move $80,000 into your bank account. It cannot do that — imagine if every loan required the actual balance to be moved into your safe-deposit box. The banks would not be able to loan very much money to anyone. The bank booked the value of the house as collateral, and poof! $80,000 was created out of thin air. Banks do this all day long, every business day of the year. That money did not exist, the bank created it based upon the perceived value of the house.
In essence this is what the Treasury will do if it creates a trillion-dollar platinum coin to avoid the United States defaulting. Using a little understood clause, seigniorage, the Treasury can mint coins (commemorative or some such thing) of any face value/design as long as they are made of platinum and deposit the coin into the Federal Reserve.
So instead of being held hostage by the feral children of the Conservative party, Little Timmy Geithner can issue a coin, deposit the amount in the Federal Reserve, and America can continue to pay its bills.
Because the Trillion Dollar Coin would not be circulated, it does not increase the money supply (any more than the $80,000 load did), and does not cause inflation. It’s kind of a silly work-around, but it also appears that we are in a silly situation with one political party willing to destroy the (world) economy to stop poor people from eating.
Note that Wingnuttia is already feverishly working on a bill to stop this solution from getting in the way of their planned hostage-taking.