Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
AMD Ryzen 4900x / 5900x and 4950x / 5950x Zen3 4th Gen IPC and Clock Speed and Core Specs - 14th Aug 20
Stock Market Gap Fills Suggests Market Momentum May Stall - 14th Aug 20
Silver May Be Overextended – But It’s STILL Cheap - 14th Aug 20
A Short Guide To Making Your First Stock Market Investment - 14th Aug 20
Is Tech Reality Affects our Dating Possibilities? - 14th Aug 20
Will You Make Money in the New Silver Bull Market ? - 13th Aug 20
Hyper-Deflation Capital Destruction And Gold & Silver - 13th Aug 20
Stock Market Correction Approaching - 13th Aug 20
Silver Took the Stairs to $21 in 2008, Took Escalator to $29 2010. Is Silver on Elevator to 120th floor today? - 13th Aug 20
President Trump Signs Additional COVID Relief – What To Expect from the Markets - 13th Aug 20
Has Gold's Upward Drive Come to an End? - 13th Aug 20
YouTuber Ads Revenue & How to Start a Career on YouTube - 13th Aug 20
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

U.S. Economy Saved by a Trillion-Dollar Coin?

Currencies / Fiat Currency Aug 07, 2011 - 03:50 PM GMT

By: Robert_Murphy

Currencies

Best Financial Markets Analysis ArticleNow that the "crisis" over the federal debt ceiling has been averted, we can leisurely explore two of the wackier proposals that emerged during the state of panic. Not surprisingly, the schemes involved the Federal Reserve and its ability to circumvent, not just standard accounting, but also the traditional divisions of political power. It's worth studying the episode carefully because we will probably see one or more of these "solutions" promoted as the only answer to another crisis in the not-too-distant future.


Bernanke and Geithner Don't Need No Stinkin' Debt-Ceiling Increase

Late last week, when more and more analysts contemplated the horror of a US government default and partial shutdown, Jack Balkin — a professor of constitutional law at Yale — outlined strategies that the White House could use to evade the pesky borrowing ceiling imposed by a fickle Congress:

Are there other ways for the president to raise money besides borrowing?

Sovereign governments such as the United States can print new money. However, there's a statutory limit to the amount of paper currency that can be in circulation at any one time.

Ironically, there's no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.

The government can also raise money through sales: For example, it could sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government's checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days. And there are probably other ways that the Fed could achieve a similar result, by analogy to its actions during the 2008 financial crisis, when it made huge loans and purchases to bail out the financial sector.

The "jumbo coin" and "exploding option" strategies work because modern central banks don't have to print bills or float debt to create new money; they just add money to their customers' checking accounts.

These suggestions should horrify anyone who understands the importance of sound money. Not only are the proposals themselves preposterous, but the mere fact that they are being discussed is a symptom of the cultural decadence wrought by the government and the Fed's responses to the 2008 financial crisis.

Money for Nothing

When critics of the Fed assert that Bernanke creates money "out of thin air," they mean the following: The Federal Reserve has the power to buy whatever assets it wants at whatever price it wants. In principle, Treasury Secretary Geithner could sell a paperclip to the Fed for $2 trillion. The Fed would simply write a check made out to the Treasury, drawn on the Fed itself.

When the Treasury deposited this check with its own bank — which just so happens to be the Fed — then its own "checking account" balance would go up by $2 trillion. This money wouldn't come from anywhere in the sense that some other account would need to be debited $2 trillion. On the contrary, the system's total reserves (and what is called the "monetary base") would have swelled by $2 trillion. The Treasury would be free to start paying bills by writing checks on the $2 trillion in its account.

The only kink in the plan would be the state of the Fed's balance sheet. Initially it could value the paperclip at $2 trillion — what the Fed paid for it — and list the paperclip among its other assets such as Treasury bonds and mortgage-backed securities.

"These suggestions should horrify anyone who understands the importance of sound money."

Of course, people in the financial markets would cry foul. They would know that if the Fed's books were "marked to market," the paperclip would be worthless and the Fed would suddenly be insolvent according to regular accounting rules. (Its liabilities, in part consisting of bank reserves — which are dollar-denominated claims on the Fed — would have risen by $2 trillion, while its assets didn't budge.) But this would merely be an embarrassment rather than a legal obstacle because the Fed has put into place Orwellian rule changes that allow it to shield its shareholder equity from capital losses.

The difference between my absurd paperclip scheme and the two proposals discussed by Balkin is one of degree and not of kind. As of this writing, platinum is trading for a little less than $1,800 per ounce. Thus, $2 trillion in platinum would weigh about 35,000 tons, almost one-sixth the weight of the Sears Tower. (Those would be two of the heaviest coins Bernanke would likely encounter in his life.) Clearly, the platinum coins stamped "$1 trillion" would not actually be worth that in terms of the metal content.

Things are just as bad with the option scheme in which the Fed would quite deliberately pay $2 trillion for an asset that it intended to hold until it expired as worthless. At least my hypothetical paperclip would still be useful after 90 days.

Debasing the Money, As Well as the Public's Ideology

Conventional "open-market" operations are a convoluted form of legalized counterfeiting, as I've explained before. The virtue of Balkin's discussion is that the sleight-of-hand is minimized and most readers will be able to see the naked redistribution in all its glory (or lack thereof). We are moving ever closer to the point at which the government runs the printing press to directly pay its bills, just as surely as the monarchs of old who added base metals to the coinage of the realm.

The danger of these proposals doesn't consist solely in the price inflation and transfer of purchasing power that they would entail if implemented. No, simply the discussion of them by allegedly sophisticated scholars further degrades the public's understanding of money. More and more Americans are "learning" that saving and frugal living is a sucker's game, because the Treasury and Fed will simply create money to bail out their rich buddies.

Conclusion

Flawed as it is, the US Constitution vested fiscal authority with the Congress — rather than with the Executive Branch — for an important reason. The president has several advantages, not least of which is his (or her) ability to wage war. Therefore the Constitution seeks to limit that power by keeping the purse strings in the hands of elected representatives.

If the Treasury ever falls back on a scheme such as the ones Balkin discusses, the United States will be one step closer to an outright dictatorship. The American president now claims the authority to execute US citizens without any judicial oversight at all. This is not a person to whom we should grant a printing press.

Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, and The Politically Incorrect Guide to the Great Depression and the New Deal. Send him mail. See Robert P. Murphy's article archives. Comment on the blog.

© 2011 Copyright Robert Murphy - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules