On the Platinum Coin

Okay, so the Treasury mints a Platinum coin, and deems it to be worth One Trillion Dollars.  We have a fiat currency, so what is the problem?

There are fiat currencies, and there are fiat currencies.  Depositing something as collateral into the central bank where the “melt value” is decidedly less than one million, much less trillion dollars, is ridiculous.  I realize that many believe that the Fed can do whatever it wants, but eventually cash flows will catch up with a central bank as inflation rises.

The Trillion dollar coin would have value only because the taxation authority of the US Government stands behind it.  But that is not the way the government is behaving.  The taxation authority is not taking in as much and more so that they can redeem the promises inherent in the coin.  Instead, they are looking to the Fed to absorb losses in a stealth monetizing of the debt.

Monetizing government debt leads to inflation.  Receiving something worthless, and deeming it to be of high worth is the same as monetizing the debt.  Yes, the Fed can try to sterilize the effects, but it leaves the Fed with a problem — it will never be able to shrink its balance sheet to 2007 levels.  Thus inflation, eventually.

The platinum coin is a bad joke, and bad policy if eventually done.  This is what I wrote at Felix Salmon’s blog yesterday:

If they tried the platinum coin(s) once, Congress would legislate to eliminate the practice. The Purple party would take back their authority.

It is also possible that the Supreme Court would make them reverse the transaction, on the grounds that only Congress can regulate what is money. The executive may not. The minor exception made by Congress for platinum coins was only intended for numismatic coins — not anything large.

But yes, Felix, you are right. This would end the concept of the dollar as a reserve currency. Only banana republics monetize their debt. Hey, maybe even the Fed would develop a backbone, and refuse the coin, or tell them it is only worth $1000. They don’t want to be stuck with QE not of their own design. Their QE is bad enough, but the coin, which will be a hole in the Fed’s balance sheet for as long as it lasts will be far harder to reverse.

You can’t get something for nothing.  Monetary stimulus is garbage, it steals from savers to reward solvent debtors.  Insolvent debtors can rot.  As with all monetary policy, stimulus helps the solvent.

This is a huge advertisement to get the government out of the economics business.  It has never been good at it, and this is proof.  The government might be able to goose things in the short-run, but it never succeeds in the long-run.

As it is, our government is addicted to short-run policy, and as such, does not consider long-run solutions that might be painful in the short-run.

Too bad.  Your kids lose, while you don’t seem to lose much for now.  This is a lousy position to be in.  People play for short-term advantage while while inflation increases.

You can’t get something for nothing.  Either there will be inflation, or taxation to pay back the platinum coin.

7 Comments

  • danyzn says:

    “You can’t get something for nothing” sounds like the most obvious thing in the world, but a moment’s reflection shows it to be wrong. The invention of money was getting something for nothing. The fact that people use money shows that they are getting something for nothing. You can of course misuse it and take it too far, but just saying “you can’t get something for nothing” doesn’t prove anything.

    • No, you can’t get something for nothing. The creation of unbacked money induces inflation. There is no free lunch.

      • Pacioli says:

        “The creation of unbacked money induces inflation.”

        Well, maybe. But definitely not necessarily.

        Inflation is only induced if (and only if) said creation outstrips productive capacity.

        There is so much slack in the current economy amid the current massive private sector debt deleveraging (which still has a long way to go) that it comes as no surprise that inflation levels remain extremely muted.

        Here is a more carefully researched synopsis of how the platinum coin would be consistent with the current QE program, what the exit protocol is (when the time comes), and why it would be a non-event in terms of private sector net financial assets: http://goo.gl/tTmPz

  • effem says:

    Japan has been printing money (for nothing) for decades with no inflation. Your printing=inflation theory is way too simplistic.

    • richt says:

      Effem, this is just not true. Go look at the growth in the BOJ balance sheet since 1990 and compare it to the Fed balance sheet since our bust began. There is no comparison at all.

      I just don’t understand how this myth of Japan as a huge money printer endures. It is simply not correct.

  • Greg says:

    The one and only way you can get something for nothing is to steal it.

    Supposedly theft is against the law — but this assumes the rule of law has not broken down (as it has in many banana republics, and seems to be happening in the USA today)

    There is also that whole “Thou shall not steal” thing from God — commandments that (while numbered differently) underlie Judaism, Christianity, and Islam.

    As an adult in Chicago, Obama chose to attend a ministry where the preacher was known to scream “G__damn the United States!!!” at the top of his lungs. The preacher has the right to free speech, but I have to wonder about a religious man using the Lord’s name in vain. I also have to wonder about a national political leader that hates America so much.

    Things were so much better a few years back when the idiots and crooks of Washington were preoccupied with screwing up other countries instead of our own.

  • Conscience of a Conservative says:

    I think this story originated from the White House. It’s a trial/balloon leak being used in the war against the Republicans in the debt cliff negotiations. Agree that it’s preposterous with one caveat. that many of us always feared that the gov’t would ind a way to monetize the debt. I don’t think it happens this time, but at some point I’m not so sure….