January 23, 2013
No doubt, you’ve heard about the latest irresponsible fiscal/monetary proposal to be floated by members of Congress and the erstwhile economist, Paul Krugman, whose lunch was just eaten by Jon Stewart.
It entails having the Treasury avoid the federal debt limit by handing the Federal Reserve a single $1 trillion platinum coin. The Fed would then credit the Treasury’s bank account with $1 trillion, which the Fed could spend on the President’s lunch, a $200 toilet seat, a new aircraft carrier, more Medicare spending – anything it wants.
Is there anything special about platinum? Well, yes. The coin doesn’t have to contain $1 trillion worth of platinum. It can be microscopic for all the Fed cares as long as they can use a electron microscope to read the $1 trillion In God We Trust inscription. But it has to be made out of platinum. No other metal or substance, like a piece of pizza, will do. The reason is that the Treasury has the right, by an obscure law, to mint platinum coins, but only platinum coins. Otherwise, making money by making money is the Fed’s domain.
Countries that pay for what they spend by printing money or, these days, creating it electronically, are usually broke. That certainly fits our bill.
Our country is completely, entirely, and thoroughly broke. In fact, we’re in worst fiscal shape than any developed country, including Greece. We have fantastically large expenditures coming due in the form of Social Security, Medicare, and Medicaid payments to the baby boom generations – I.O.U.s, which we’ve conveniently kept off the books.
When the boomers are fully retired, Uncle Sam will need to cough up $3 trillion (in today’s dollars) per year to pay us (I’m one of us.) these benefits. To put $3 trillion in perspective, it’s 1.5 times Russia’s GDP.
These benefits are called entitlements because, presumably, we feel we are entitled to hit up our children to cover their costs. Borrowing from them and letting them tax themselves and their kids to pay themselves back is a good trick, but it’s running afoul of the debt ceiling. Taxing them more and promising to the pay them benefits they’ll never receive is an old trick that’s run its course. So we’re now onto printing money that will, we hope, raise prices only after we have protected our assets against inflation.
And we’re printing lots and lots of money. Indeed, over the past five years, the Treasury has, in effect, done its $1 trillion coin trick twice.
Well, substitute a $2 trillion piece of paper called a Treasury bond for the platinum coin. Suppose the Treasury prints up such a piece of paper and hands it to the Fed and the Fed puts $2 trillion into its account. No difference right, except for the lack of platinum.
Next suppose the Treasury doesn’t hand the $2 trillion bond to the Fed directly, but hands it to John Q. Public who gives the Treasury $2 trillion and then hands the bond to the Fed in exchange for $2 trillion. What’s the result? It’s the same. The Treasury has $2 trillion to spend. John Q. Public has his original $2 trillion. And the Fed is holding the piece of paper labeled U.S. Treasury bond.
Finally, suppose the Treasury does this operation in smaller steps and over five years, specifically between 2007 and today. It sells, i.e., hands to John Q. in exchange for money, smaller denomination bonds, which Johns Q. sells to the Fed, i.e., hands to the Fed in exchange for money. Further, suppose the sum total of all these bond sales to the public and Fed purchases of the bonds from the public equals $2 trillion. Voila, you’ve got U.S. monetary policy since 2007.