Thursday, January 10, 2013

The Trillion Dollar Coin: The Zimbabwe Dream of the Obama-heads

Why do banks spend money making sure that their branches look good and solid? Why do banks spend even more money making sure their main offices look as solid and stately and settled as ancient temples?

Is this what Yglesias
and the Obama-heads
have in mind?
Why, to give the illusion of solidity. Because in finance, the illusion of solidity begets solidity—just as the appearance of banana republic-dom begets a banana republic.

The trillion dollar coin idea floating around out there is the dumbest idea ever—but it’s also dangerous for two reasons: It is a naked power grab by the executive, and it shatters the illusion of solidity and sense in the monetary system.

Matt Yglesias over at Slate is fervently in favor of the trillion dollar coin idea, and he gives as good a précis as any of the situation.

Treasury Secretary Tim Geithner can order the United States Mint to create large-denomination platinum coins—a $1 trillion coin, say, or a bunch of $10 billion coins—and use them to finance the government.

Really.

It all goes back to sub-section (k) of 31 USC § 5112 “Denominations, Specification, and Design of Coins.” The opening subsections consists of boring specifications about the coins the United States issues. Subsection (k) says “The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.”

So there it is in black and white. Geithner can have the Mint create a $1 trillion coin. Then he can walk it over to the Federal Reserve and deposit it in the Treasury’s account. Then the government can keep sending out the checks—to soldiers and military contractors, to Social Security recipients and doctors who treat Medicare patients, to poor families getting SNAP and to FBI agents—it’s required by law to send—and the checks will clear. It’s a simple, elegant solution.

Naturally, people have doubts.
No shit people have doubts. And as to it being a “simple, elegant solution”—more like “ham-fisted and borderline nuts” is how I would preemptively characterize the scheme. But I’m getting ahead of myself.

In his piece, Yglesias outlines and answers three objections to the trillion dollar coin idea—or at least tries to answer them: The first is legality and the issue of lawmaker intent. The second is whether this is a power grab on the part of the executive. And the third objection is that it creates a bad precedent.

To answer the first objection about lawmaker intent, Yglesias claims—in the tone of someone reassuring you that that bump you’ve just discovered on one of your balls is no big deal—that “lawyers assure me this [objection] is irrelevant”—that lawmaker intent doesn’t matter.

But that’s bullshit: Lawmaker intent has always mattered insofar as the courts deciding what is and is not legal are concerned, both in the prohibitive and the permissive senses. To give an obvious example: It’s illegal to falsely cry “Fire!” in a crowded theater, or by other speech cause a panic in a public space—but that law certainly was never intended to curtail free speech in, say, a public demonstration, and no court would ever stretch such a law so as to make such speech illegal. An example of the permissive: It is legal to jog in public places—but that law was just as certainly never intended to allow joggers to, say, run down the middle of any of the Interstate Highways. Again, no court would grant a jogger the right to run down the middle of an Interstate, just because it’s legal to run in public spaces generally.

Courts and the justice system pay attention to why a law was passed—the lawmaker intent—precisely and specifically so as to determine whether an action is legal or not.

The coin minting of the Executive was never intended as an end run around the debt ceiling. It was clearly, obviously intended to allow coin collectors to buy and trade commemorative U.S. coins.

So giving a Talmudic read to the relevant statues, and then trying to roll a trillion dollar coin through that loophole, is just bullshit. Any court would throw out such a reading.

As to whether this trillion dollar coin idea creates a bad precedent, well of course it sets a bad precedent . . . but when has “establishing a bad precendent” ever hindered anyone from going ahead with something stupid? The “bad precedent” argument is specious.

But the second objection Yglesias slips in there so casually, about how this policy is Executive overreach? There is some meat on the bone that we can really chew on.

To the question, “Is the trillion dollar coin idea a power grab on the part of the Executive?”, the answer is: Hell yeah!

First off, there is no reason the trillion dollar coin couldn’t be four, five, ten or twenty trillion instead. Thus the Executive could raise funds by this method to simply pay off the entire national debt, and fund via discretionary spending anything and everything it might want.

Second, by creating the trillion dollar coin, the Executive is able to spend regardless of what Congress passes insofar as the budget is concerned—rendering Congress superfluous to the spending process.

Third, a trillion dollar coin would effectively rescind the Federal Reserve’s independent control of the currency. After all, in the current regime, the Fed alone controls the money supply. But with the trillion dollar coin, the Executive could simply print away any and all fiscal problems by expanding the money supply ad infinitum.

And here is where we get to the issue that I find most troublesome: Solidity of the fiat currency regime.

For good or bad, whether we like it or not, the U.S. dollar is a fiat currency—it floats on nothing but trust. It is not pegged to gold, or to any other currency. Its worth is determined by what its users—that is, everyone—believe it is worth.

If the Executive were allowed to directly monetize the Federal government debt by way of one or more trillion dollar coins, then fairly quickly, the illusion of the dollar’s solidity would shatter. Fairly quickly, the people’s trust in the dollar would evaporate. This is exactly what happened in Zimbabwe: The government printed in order to pay its bills, and printed so much that pretty soon, nobody wanted Zimbabwe’s currency. Hence one-hundred trillion dollar bills, which is amusing for people not living under such a regime, but horrifying to those who do.

Even if only a single trillion dollar coin were deployed, the temptation to do it again would be enormous—uncontrollable. You ever heard of a recently deflowered virgin deciding to swear off sex forever and ever after? Obviously not—so with each issuance of each trillion dollar coin, there would be a continued weakening in the faith and trust in the dollar, until the dollar reached Zimbabwe-like levels of ridiculousness.

Is this what the people want? A United Banana Republic of America? Because that is what mindless Obama supporters such as Yglesias seem to want, with this idiotic trillion dollar coin idea: Even more power centered on the president, and a further debasement of the currency.

So far, Obama has abrogated rules governing assasination of American citizens by the American government, free speech, and rules regarding unlawful detention and punishment, not to mention eavesdropping, unlawful search and seizure, cronyism, and a host of other crimes and misdemeanors which, in fairness, started under George W. Bush—but have grossly expanded under Obama. (Really, how does the run-of-the-mill Obama-head sleep at night, without resorting to very heavy doses of smack?) Meanwhile, the Federal Reserve, through its now continuous monetization of the Federal government’s debt via the various iterations of Quantitative Easing, is debasing the currency further every day.

So if you are in favor of continuing to turn the United States of America into the Republic Argentina with nukes, then by all means, tell everyone how ”simple and elegant” the trillion dollar coin idea really is.
If you are interested in an analysis of possible hyperinflation of the dollar, as well as other black swan events, please check out my Strategic Planning Group.

26 comments:

  1. You have placed your finger EXACTLY on the biggest threat of the Platinum Coin idea and that is further loss of confidence in the whole fiat currency with no standard experiment.

    MOST people (mainly out of ignorance because this is not taught anywhere in the US) believe that currency has intrinsic value somehow.

    Minting a coin which is a readily recognizable object to all and placing an arbitrary value of a Trillion dollars on it is to WAKE people up to the elite's game of inventing all kinds of schemes to rob from the weak to pay the elites.

    Honestly, I hope they go forward with this or at least publish enough Main Stream Media articles to get people thinking.

    ReplyDelete
  2. I have to agree with GL on this one. “The Platinum Coin Trick” is a truly shabby and dangerous way out. All the scorn which GL heaps upon it is well deserved. Perhaps a court will not find it exactly legal but merely “non reviewable” just like Obama's kill list...but I digress. Of course there is plenty of “bi-partisan” blame to go around in the creation of this culture of governmental lawlessness of which The Coin Trick is only the most recent example. And congratulations to GL for pointing this out and making the connection.

    Another thing which GL points out is the indirect monetization in which Bernanke is currently heavily engaged. Bernanke prints enough to buy treasuries to more or less cover the deficit. Oh sure, not directly from the Treasury Department but from the banks, and I suspect not so much to technically comply with the law, but more so to create another occasion of profit for these banks – at taxpayer expense. And I believe it's astute to suggest that Bernanke's monetization serves a similar purpose as the Platinum Coin slight of hand.

    I would note that the hypocrisy of Congress is most truly resplendent in this matter for I see that few if any in congress, who might be inclined to criticize the Platinum Coin Trick, would also in the same breath condemn Bernanke's monetization as being one and the same thing. GL was justified in calling out Obama along with his “Obama bots” and his kill list all in the same piece. Where are the articles of impeachment over the list – from either political party?

    Unfortunately, many politicians who feign complete “moral” outrage over Obama's shameful Coin Trick (to fund the spending that congress voted for, after all) will fully support Bernanke's care and feeding operation for Wall Street banks which, along with Zero Interest Rates, coincidentally enables congress' endless spending – spending for whatever depending upon which contributor gave the politician his talking points – all in the absence of sufficient tax revenue. This hypocrisy comes from the same political culture of expediency, political opportunism, deceit, and financial corruption which is the common practice of most “players” in Washington.

    Regards,

    Unna

    ReplyDelete
  3. The Fed is already monetizing, of course. There is no way they could ever 'sell' these treasuries they're collecting.

    If the trillion-dollar coin, or ten of them, or twenty of them will hasten the end of the insanity, then bring it on.

    Let's get it over with.

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  4. Nah. Plastic coin made in China.

    ReplyDelete
  5. Everything you said is correct except one thing. You think no court would ok it.

    You haven't been watching the courts in the US under Obama.

    They do whatever they want.

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  6. My question that bounces in my head would be. What value per ounce would that give precious metals. Let's say for example this coin was to weight 1 million ounces. Bingo the treasury just set a new price to platinum valued at 1 million dollars per ounce. A trillion is one million, million.
    I love the idea. Let's hope those jackasses decide to make the weight 100 ounces per trillion coin and watch all precious metals bounce off millions to billions per ounce.

    ReplyDelete
  7. Setting aside the minting of platinum trillions business; isn't the business of the Treasury Secretary walking over to the Federal Reserve and deposit *whatever* in the Treasury’s account the unlawful, power grabbing, executive branch overreaching here?

    ReplyDelete
  8. Gonzalo, I hunger for more on hyperinflation. I have written a Hyperinflation FAQ and wonder if you could comment on it?

    http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.html

    ReplyDelete
    Replies
    1. Of course you hunger for more inflation. It's the only thing you've known in you're life from cradle till now.

      Sorry but the take more than you give equation is doomed from the start.

      Once taking more than you give becomes impossible you'll be forced into a new paradigm, give more than you take!

      Then once the give more than you take equation, yields no sufficient return liquidation will ensue so the take more than you give equation can start again.

      We've had hundreds of year of successful yield from the take more than you give equation. Now that the yield is falling off, a new paradigm must take place to increase yield once again.

      Delete
  9. That this is being discussed seriously, means the days of fiat are numbered. Time to dig in for the coming chaos.

    ReplyDelete
  10. What matters is not a court of law.

    What matters is the court of public opinion.

    This piece is part of Krugman's ongoing contribution to creating the vocabulary and the narrative necessary to shape public opinion and convince America to embrace the MMT/Greenbacker/pseudo-Austrian solution - have government coin/print money and spend it into circulation, eliminating the creation of Treasury debt.

    When adopted, super-massive inflation will result, as it did when adopted numerous times in the past.

    The academics say all you need to do to keep inflation down is to tax the citizens. This is textbook theory, which never works in the real world because it never accounts for human behavior.

    In the real world of real humans the level of taxes necessary to hold down inflation will be so confiscatory it will require a totalitarian state to collect it.

    Meanwhile, our president's first choice for treasury secretary ran a proprietary trading unit at Citigroup that bet on the collapse of the housing market. He was paid $900,000 after Citigroup pocketed mucho-mega TARP money.

    Nobel prize winners advocate policies that lead to totalitarianism.

    Those who steal from us get rewarded, and then become our leaders.

    Stop the world, I want to get off.

    K Smith

    ReplyDelete
  11. Mr Lira,

    Appears you have gone off your rocker waiting for USD hyperinflation that will not be coming any time soon. Perhaps you should actually try to understand Argentinia's, Zimbabwae's, Weimar's, add any other noncore economy of your choice's history.

    ReplyDelete
  12. Mr Lira,

    Care to explain how the US consumer will acquire the wheel barrels full of money necessary to drive hyperinflation, when the average consumer has maxed out there available debt? Care to explain how all this FED printing will get into the hands of consumers?

    ReplyDelete
    Replies
    1. This video is just over a year old. These guys used piles of cash to buy beer. Do you know where they got it? It was probably old bills laying around their house nearly worthless as the new bills had more zeros on them. Like loose change.

      http://www.youtube.com/watch?feature=player_embedded&v=RgAcHeL1dro

      Delete
    2. Oh, and the way the money gets into the hands of the public. The Fed makes new money and buys government debt. The government spends the new money. The government is spending about twice what they get in taxes, so they spend a lot of new money.

      Delete
    3. Vincent,

      Apparently you aren't aware of what the US government spends a majority of those newly minted FED digits on? Here is a little hint; DEBT

      Currently the amount of taxes collected can't even cover the interest payments. Sorry but going into greater and greater debt IS NOT inflationary.

      Delete
    4. Vincent,

      With regards to the video. That obviously isn't in the US or any country that holds world reserve currency status.

      Sorry but observing a noncore economic phenomena (in Russia) and concluding the same will happen to the core economic global power (US) is ignorance.

      Delete
    5. You asked how the money gets into the economy and where they get piles of money from. I explained. You then accuse me of ignorance. Wow.

      Delete
    6. You explained nothing.

      The MAJORITY of government spending is on DEBT that is already owed.

      So you think government spending will result in the general public getting the wheel barrels full of cash, or will be sufficient in it self to drive hyperinflation? LOL!!!

      Sorry but that viewpoint is based in ignorance.

      Delete
  13. Mr/Ms Anonymous,
    The US consumer will get wheelbarrows full of money from the entity that will be creating it - the US government.

    The means by which this will happen is the Fair Tax. You will begin to hear more and more about this proposed legislation. What you will hear will be designed to convince you it is the best idea since sliced bread.

    Do not believe what you hear in the news or read in the books or view on the internet about the Fair Tax. You have to read the Fair Tax legislation.

    It grants massive powers to the Secretary of the Treasury. It will be our generation's Federal Reserve Act.

    The Fair Tax is a program of massive taxation. The taxes due will be so massive and intrusive it will require a totalitarian state to enforce it, the totalitarian state we have in place right now, as I type this.

    The Fair Tax is also a program of massive money printing. It contains a provision called a pre-bate, which is really a mechanism designed to inject massive amounts of money into the economy.

    Thru the pre-bate, the entity established to administer the Fair Tax will deposit money created out of thin air every month directly into the bank accounts of each person in America.

    No wheelbarrows necessary.

    The logo for the Department of the Treasury includes a stylized image of an eagle. Among many who rely on government assistance for the basic needs of life, the day the check comes is known as the day the eagle flies.

    Under the Fair Tax, the eagle will fly for all.

    K Smith

    ReplyDelete
    Replies
    1. With all due respect K Smith you are incorrect and I believe to be terribly confused about how the global monetary system functions.

      Sorry but more US taxation which most certainly is coming is NOT inflationary. In fact it is the exact opposite.

      The US government hasn't engaged in money printing since the Civil war. I believe you are confusing debt printing with money printing. Mathematically this is the same as confusing -2 with +1. Sorry but -2 Does NOT Equal +1, no matter how much you want it to.

      Fact is the US Government is going to be issue whatever amount of DEBT it needs without worry of hyperinflation. The majority of that debt will never see the free market. It's only function is to roll over the previous debt and allow a slow deflation from which they can extract more productivity than a quick Violent deflation.

      Sorry but -1 plus -1 = -2 not +2

      Delete
  14. I think the trick is: there's not enough change for those banknotes to enter any kind of transaction despite the one they were meant for. So while inflaction occurs when there's A LOT of money around to pay for your bread and milk (thus the supermarket feels like making you pay 1,000,000 $ for bread and milk is legit), a few trillion dollar notes couldn't literally be spent for anything but paying the foreign debt. So the daily market should still deal with the same monetary reserve, because those notes wouldn't add up to it. It IS kind of clever. Which of course wouldn't stop China from nuking the hell out of USA in sheer rage when they receive a handful of notes with an uncountable number of zeroes and the face of President Trollface on them.

    ReplyDelete
  15. Now that's what I call "a gonzalo"...Don't know where you've been but glad you're back. There is almost not enough profanity in that piece for me to believe it's really you...but what the hey, maybe you got religion these past few months. At any rate keep 'em coming. As they say, "Here we go. Hold your breath as long as you can and kick for the surface..." There are those of us who set quite a store by your opinion so for God's sake and the sake of the Union, DON'T STOP NOW.

    ReplyDelete

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GL