Friday, January 11, 2013

Should we #MinttheCoin?

The trillion dollar platinum coin idea is making all the headlines these days.

Background on the Coin:
Co-Author of Platinum Coin Law Weighs In
What about money scares everyone so much?

Background on where the idea came from:
Trillion Dollar Coin Inventor
Origins of the TDPC

The Fiscal Cliff was averted at the last second, as I expected. The deal struck was horrible for pretty much everyone. Bush income tax cuts were kept intact for everyone under $400,000/yr, but the payroll tax cut was allowed to expire. So, in reality, pretty much everyone's taxes went up. Yay, us.

Now the new point of argument is back on the debt ceiling. Congress reached an agreement to avert the point they created to provide motivation to get a budget done (fiscal cliff), but now they have a new point they created to provide motivation to get a budget done (debt ceiling). Economically, the debt ceiling serves no useful purpose. Hitting it would be disastrous, far worse and more unknown than the fiscal cliff.

If we allow ourselves to hit the ceiling, we will in effect declare voluntary default. This is like telling the bank you have the money to pay off your loan, but don't want to pay it off, except that you are a currency user and could actually run out of money to pay your loan and the government as currency issuer can never run out of money.

What are some of the effects of voluntary default?

1) Faith in the dollar would be gone or shaken severely. The safest assets worldwide are U.S. Treasuries. Failing to make good on them would shake confidence in them and the entire dollar system. All of which amounts to Global Financial Crisis, part II which is much, much worse than part I.

2) Spending would drop precipitously. Increased uncertainty and decreased confidence in worldwide financial markets would mean people would hoard money out of fear of losing more. Spending = someone else's income. So when spending decreases, income decreases. This is the good ol' paradox of thrift. We need to increase spending, not decrease it.

3) Unemployment would go back up. Perhaps faster and way worse than in 2008-9.

4) That deficit we're trying to close would get much bigger. So those wanting to close it wouldn't win in this scenario either.

5) Probable deflation, which further hurts household's balance sheet positions.

6) Interest rates would probably go haywire.

7) Stock market collapse, again. Any gains made since '08 would likely be gone again. Retirement savings and pension funds would be hurt badly, if not completely wiped out.

Basically, we can't and won't hit the debt ceiling. So why are politicians threatening to do so?

Economically, the ceiling is useless, which is why we should just get rid of it, but politically it is a tool to try to limit government spending or the size of government. But note that the size of the debt isn't a measure of the size of government. It IS the measure of the savings in US dollars of all those who hold treasury securities, which includes US citizens. So setting a debt ceiling doesn't usefully limit the size of government either.

Hitting the ceiling just isn't an option. We shouldn't even have a ceiling. If we expect our economy to grow, then we should expect the debt to get bigger and bigger forever and ever and this isn't a bad thing and won't cause hyperinflation.

So if the choice is between minting the coin and hitting the ceiling, the choice is easy. Mint the coin.

The Treasury can mint the coin because of a loophole in the law, but that doesn't mean doing so is invalid or not a viable option. It is very valid, real, and viable. It demonstrates very well that the issuer of the currency does not need to issue debt to spend. It issues debt in part to drain reserves from the private sector to avoid inflation and to control interest rates. It also issues debt to provide safe assets to the private sector.

Spending without issuing debt does not automatically mean inflation. To get inflation, we must spend past capacity. We have lots of unused capacity in our economy, we aren't going to cause inflation with the trillion dollar coin.

Minting the coin would only prolong the malaise of our moderate deficit providing low growth overall. It wouldn't fix the economy by itself.

That said, I am not in favor of using the coin. I would much rather our politicians come together and make a budget suitable for good growth and a strong economy with full employment and a robust financial system. They don't seem to want to do that. It is terrible that one party would unilaterally exploit a loophole in the law to support its own ends, but it is also terrible that a party would hold hostage the economy with a needless debt ceiling because they can't find common ground in the budgeting process. To me, it doesn't matter which party is which. If they were reversed, I'd feel the same.

It is all extremely disappointing. It is disappointing that they don't understand their own monetary system and it is even more disappointing they can't work together.

In summary, 3>2>1.

1) Hit debt ceiling. Voluntarily default on promised payments. Economic disaster.

2) Mint the coin. Avoid economic catastrophe, but continue low growth malaise.

3) Repeal the debt ceiling. Cut payroll taxes. Spend more on infrastructure and less on defense and porkbelly spending. Don't worry about the deficit and debt. Focus on unemployment, inflation, GDP, and poverty instead.