It is first-order, stupid humor to make fun of this trillion dollar coin idea with a Dr. Evil joke. But I can’t resist. I also can’t resist calling it the Diet Coke of evil.
So I’m sure by now everyone has heard of this ridiculous trillion dollar coin idea, and while I don’t think anyone understand the mechanics of it (certainly not anyone in Congress, whose members don’t even know how a bond works), what the dummies do understand is that it is an end-around on the deficit, and that’s all they care about. So let me walk through this step by step and try to deconstruct what would happen if we actually did this.
So the Treasury has the authority to mint whatever they want to mint. For background, let it be known that the silver bullion coins that Treasury mints are a $1 denomination (interestingly, they are $5 in Canada) and the gold coins are a $50 denomination. Currently, platinum coins are a $100 denomination (paradoxically, because platinum is cheaper than gold nowadays), but have not been minted in the U.S. since 2008.
Now, Treasury can make bullion coins whatever denomination they want (leaving aside the whole discussion about how dimes and quarters are essentially made of junk and the whole seigniorage phenomenon). So, yeah, if they want to mint a trillion dollar coin, they can mint a trillion dollar coin.
What happens next is interesting. The Federal Reserve is a big holder of Treasury debt (obviously), so the Treasury could retire (i.e., pay off) that debt by paying the Fed that trillion dollar coin. The Fed now has a trillion dollar coin and there is a trillion dollars less debt out there. We avoid the debt ceiling for another year. Huzzah!
This is where things really get amazingly, blindingly ridiculous, because the whole problem with fiat currency is that it is worth whatever the government says it is, and the problem with that is that the government can take something that is totally useless (paper) and make it worth something. By making, by law, something that is essentially worthless (in this case, a coin, which, by market prices, is worth about $1600, or, a little more with the premium owing to scarcity value) worth something does not mean that it is actually worth something. The quarter in your pocket is still essentially junk and the fact that you can buy something, anything with it rests in the confidence of the full faith and credit of the U.S. government.
Well, if the U.S. government goes around playing a joke on everyone with a trillion dollar coin (the pinnacle of stupidity, the freaking zenith of it), it won’t be long before people don’t trust the government anymore, to the extent that they do in the first place. People will correspondingly lose faith in the currency in circulation, and will resort to other stores of value and/or barter. This is an interesting lead-in into the whole purpose of gold in the first place (are you listening carefully, gold bears?) because gold, which has value only because it is scarce, and whose value is determined by market prices, which is almost infinitely indivisible and also portable, meeting all the definitions of a medium of exchange. Therefore, this should settle once and for all the discussion about whether gold is an asset or a currency. Ben Bernanke thinks it is an asset. He is wrong. I don’t own hundreds of ounces of an asset, I own lots and lots of the world’s only true currency.
This is all exclusive of the fact that M0 actually goes up by a trillion dollars, which is inflationary in principle, even though it is very unlikely that the Fed would ever allow that coin into circulation, although it would be fun to get your hands on it and buy the entire state of...Florida. In fact, they should keep that sucker under lock and key, like the anthrax virus. Although it would be the best Ocean’s Fourteen movie of all time if Danny Ocean and Rusty Ryan break into Fort Knox and abscond with it.
The really interesting aspect of this whole “discussion” is that the Democrats, and Paul Krugman, are in favor of it! They love it! That is the part of this sad story that is actually not funny at all, it is quite scary. It shows the extent to which people will resort to gimmicks and tricks to continue their irrational behavior. So in terms of gimmicks and tricks, this is pretty junior varsity. The real legerdemain is the printing of money to buy bonds, which we have been doing for four years, because that is a lot harder for people to understand than minting a stupid trillion dollar platinum coin, because not even Joe Sixpack is fooled by that (only Democrats).
From the dailydirtnap.com
I lost it at the second to last paragraph.
"This is all exclusive of the fact that M0 actually goes up by a trillion dollars, which is inflationary in principle, even though it is very unlikely that the Fed would ever allow that coin into circulation, although it would be fun to get your hands on it and buy the entire state of...Florida. In fact, they should keep that sucker under lock and key, like the anthrax virus. Although it would be the best Ocean’s Fourteen movie of all time if Danny Ocean and Rusty Ryan break into Fort Knox and abscond with it."
hahaha
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/09/the-platinum…
I need someone to explain this to me. According to the Washington Post article:
Isn't the purpose of the debt ceiling to ensure fiscal responsibility and to prevent rampant spending? At what point does the US begin to pay back its debt? Seriously, at one point does the Fed write a check to China, paying back both interest AND PRINCIPAL? That is the idea correct? The goal is to one day knock the debt down to zero right? Am I missing something here?
So here's the basic story with the debt-ceiling. Around 1940 Congress established an overall limit to how much debt the country could incur. At first, this sounds reasonable, but in practice it leads to all sorts of absurdities.
Consider: Congress enacts laws that increase the deficit (and thus the debt), such as tax cuts, programs like Social Security, etc. All the government programs that Congress has voted for require funds. And the President's primary function, in fact, is to put into action the laws that Congress has passed. But then the President finds that Congress has both ordered him to pay for Medicare, but has also ordered him not to raise the funds to pay for Medicare, because he is ordered to stop raising debt beyond a certain point. The debt ceiling is preventing the President from enacting laws that have already been passed. No new laws are necessary to increase the debt/deficit; laws such as Medicare increase in cost as the population grows and ages, so the debt ceiling is being reached because of very old laws, not new ones.
It is a ridiculous situation. For the past 70 years, Congress has periodically dealt with this by raising the debt ceiling while a minority of Congressmen including, unfortunately, Barack Obama, score political points while posturing against raising the debt ceiling and making symbolic votes against it. Now, for the first time, the majority party is claiming they will refuse to raise the debt ceiling, which means that refusing to pay for the US's already promised obligations.
So what does this mean if the debt ceiling is reached and not raised? The fact is, no one knows. No other country has anything like a debt ceiling, as far as I know, and the sort of default that will be incurred is not at all clear. This isn't an "ordinary" government shutdown, because instead of not passing a new appropriations bill, the government won't be paying for its existing obligations. If the government uses existing revenues to pay off its bonds, but does not pay social security, is this a default? What will happen to treasury rates? Credit default swaps? What programs will be paid for, and which will not? The US Treasury market is the most liquid and transparent in the world, and most of the modern financial system is based off of it. The consequences of breaching the debt ceiling are potentially catastrophic. But also, could potentially be limited if financial markets view continued payment on bonds as not being a default, even if other government obligations such as Social Security go unfunded.
The idea is - and I hope someone corrects me if I'm wrong - any nation would want some level of debt. That's right, because if the country is not borrowing and taking on debt then it is not operating as efficiently or effectively as it can. Think about two large businesses in any field - with one that borrows and one that doesn't. Obviously debt financing offers a sort of competitive advantage.
The goal would be to stagger the debt so that new debt arrives once old invoices are paid off. That way, interest expenses would be under control. Unfortunately that isn't how the US government has run the country at all.
Another thing: the government does not need to eliminate the debt, just stabilize it is a percentage of GDP. The government never eliminated the massive debt from WW2, but because the country was growing, and to some extant because of increased inflation, the once massive debt became a near-irrelevancy.
Jared -- I loved your book Street Freak. If you write another book, I'll buy it. In fact, if your second book sucks, I'll give you the benefit of the doubt and buy book 3. That's how much I liked Street Freak.
100% agree - was an awesome read. just finished it over my vacation.
You bring up a good point about gold being the only "true" currency of the world. A currency, by nature, is something that grants an individual a claim on output, right? Kind of like a permission slip to consume.
So what happens if a country produces $15.6 trillion worth of goods and services, but because the amount of currency is so finite, only $1 trillion of those goods and services can be consumed at once? This is the problem with gold. It does not work for big economies because it is so scarce in quantity.
Inflation is 2-3% a year because GDP grows at that rate. The amount of currency in a country has to correspond to the amount of goods and services that country produces. Meaning, if you gave all of the United States currency to one person, that person should technically be able to purchase $15.6 trillion worth of goods and services. Imagine if gold were the United States currency. Although we'd have $15.6 trillion worth of goods and services in the economy, that person would only be able to purchase say $1 trillion worth using ALL of the currency in the country. That doesn't seem right, does it?
The United States Dollar is perfectly fine. If you read the most recent F.O.M.C meeting minutes, the central tendency projections for PCE index growth are expected to remain around 2% through 2017 (despite a $2.8 trillion Fed balance sheet). It's very easy to criticize Krugman and the Fed, but you have to remember, conducting proper economics and monetary policy in today's extremely unconventional times is like hitting a moving target that varies in pace. It's not just about reinstating gold as a national currency, nor is it about prescribing the right tool. It's a deeply structural problem, and if you believe that we will live better in 10 years than we do today (which has happened every decade for the last century, so I wouldn't bet against it), then the dollar is just fine as a medium of exchange.
I will never understand people who argue against a free market for currency. Gold would just increase in regards to its buying power, and also the incentive to mine gold and to find alternative sources for gold would drastically increase. Saying only 1 trillion dollars of 15.6 trillion dollars of goods would be consumed assumes a ceteris paribus situation. Also, compare America during the time of the gold standard to the time of fiat currency. The only people who benefit from fiat currency is the government, banks and entrenched interests.
That Oceans comment reminded me of Evil Genius. Did anyone here ever play that game as a kid? You could steal a one million dollar bill as a piece of "über loot" in the game. To put this in perspective of rediculousness, it was on par with stealing the Ark and stealing the Eiffel Tower with a shrink ray. What does this say about a trillion dollar coin?
Great post man thanks a bunch
While spot on how rediculous (and dangerous) of an idea this is , there were a few points to clarify. The Treasury could not deposit the coin for $3 trillion at the fed AND pay off $3 trillion in debt (bonds). It can do either or. The reason the fed comes into this is because it is the bank to the federal government. For example, to make interest payments on Treasury Bonds, the Treasury department instructs the New York Fed to make wire transfers from the Treasury designated account to the holders of the securities (as defined in the Fedwire Securities system).
I think one of the stupidest reasons for this (beyond the immediate inflationary effect) would be the signal that monetory policy is no longer independent from fiscal policy. It basically allows the exective branch to print money, undermining the role of an independent central bank. While some may say that this is a major exception, I wouldn't be surprised if Treasuries went up some bps (in the near term) due to this. In essence, this increase in interest payments may offset all the potential spending cuts Republicans are risking a default over. The bottom line is we're all screwed when you place the credit worthiness of your country into the hands of American politicans.
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