08 Jan 2013

America’s Platinum Express

Economics, Federal Reserve, Krugman, Market Monetarism, Scott Sumner 59 Comments

I have a question and a comment:

==> The “trillion dollar coin” thing is just because a billion is too little, and a quadrillion is too much, right? For example, there’s nothing to stop them from using this “option” but doing so by minting, say, 10 coins each with a face value of $100 billion?

==> Look at this comment from Krugman:

Don’t like the platinum coin option? Here’s a functionally equivalent alternative: have the Treasury sell pieces of paper labeled “moral obligation coupons”, which declare the intention of the government to redeem these coupons at face value in one year.

It should be clearly stated on the coupons that the government has no, repeat no, legal obligation to pay anything at all; you see, they’re not debt, and therefore don’t count against the debt limit. But that shouldn’t keep them from having substantial market value….

And maybe the coupons wouldn’t have to be sold on the open market; why not just have the Fed buy them? Bear in mind that the Fed doesn’t always buy safe assets; it’s buying a lot of mortgage-backed securities (from Fannie and Freddie; see above), and during the worst of the financial crisis it bought lots of commercial paper. So why not slightly speculative pieces of paper sold by the Treasury?

Update: If there is a legal problem even with selling these coupons, there are still alternatives, such as paying suppliers with these coupons and then having the Fed buy them. The mechanics really don’t matter; as long as we’re in a liquidity trap, printing money, printing conventional debt securities, or printing funny money with no legal standing that nonetheless lets the government pay its bills are all equivalent.
[Bold added.]

Does everyone see how crucial it is for the Fed to have the power to buy any kind of asset it wants? This is exactly the sort of slippery slope some of us have been warning about.

Even if you are Scott Sumner himself, you should be very alarmed when you’ve now got arguably the most prominent economist on Earth arguing that the government should start paying its bills with coupons that are then monetized by the Fed. That is just the barest step removed from having the Fed literally create new money to cover the government’s spending.

Forget the macroeconomics for a second. Surely there is the faintest hint of Public Choice economics buried in the souls of the market monetarists. Can we all agree that Krugman’s flippant remarks above are downright alarming? It’s the economic equivalent of people casually talking about the president having the power to blow up American citizens on a secret kill list with his fleet of flying killer robots.

59 Responses to “America’s Platinum Express”

  1. Yancey Ward says:

    History will not be surprised by this turn of events.

  2. Rick Hull says:

    Bob, stop being such an obstructionist. This public chooses more money. Who are you to deny eternal prosperity? Who will create the jobs besides the government and wheelbarrow manufacturers?

  3. skylien says:

    “It’s the economic equivalent of people casually talking about the president having the power to blow up American citizens on a secret kill list with his fleet of flying killer robots.”

    With this comparison you make it very very hard for DK to agree with you on this post.

    • Joseph Fetz says:

      I’m pretty sure that that was the intent. It’s funny how just a little bit of time and conditioning can make an insane state of affairs seem preferable. History forgotten creates a new torment, same as the last.

  4. Transformer says:

    “Forget the macroeconomics for a second”

    I don;t think you can ignore the macroeconomics. Krugman is a Keynesian who believes that the one thing that can end the recession is more expansionary fiscal policy. This can be financed according to him either by more debt or by direct govt money printing. Both ways are blocked by laws and regulations. The platinum coin and the moral bonds things are ways to bypass these laws and regulations and implement his version of correct macroeconomic policy.

    I can see a lot wrong with the macroeconomic theory behind this but I can’t argue with the logic that leads to it being proposed.

    • Bob Murphy says:

      Transformer, suppose Krugman recommended that the Fed print up a $500 billion and hand it as an interest-free loan to the Democratic National Committee. Would you just argue the merits of that proposal in terms of IS/LM?

      • xgsmmy says:

        And Bob, Obama could also suspend elections and implement martial law. I’m not sure what point you’re making.

        Let’s say Krugman recommended $500 billion to build out national broadband instead.

        • Major_Freedom says:

          “Let’s say Krugman recommended $500 billion to build out national broadband instead.”

          And xgsmmy, Obama could also suspend elections and implement martial law. I’m not sure what point you’re making.

          Let’s say Krugman recommended $500 billion handed out as an interest-free loan to the Democratic National Committee.

          Would you just argue the merits of that proposal in terms of IS/LM?

          • xgsmmy says:

            Okay, my bad. Building out broadband would be fiscal policy anyway.

            Bob does have a good point I think about this having the potential for the Fed to be able to buy anything.

            To the extent I had a point it was that this wouldn’t necessarily be the end of the world to the extent the Ben Bernanke or whoever doesn’t seize power in coup as congress could change the law governing the Fed’s power or whatever.

            And if you read Krugman’s other posts he’s not just arguing IS/LM, although I can now see that he’s not considering the power grab or whatever it is Bob’s imagining.

            Mea Culpa.

      • Ken B says:

        Bob, it will be easier if you stick to counterfactuals.

      • Transformer says:

        “suppose Krugman recommended that the Fed print up a $500 billion and hand it as an interest-free loan to the Democratic National Committee. Would you just argue the merits of that proposal in terms of IS/LM”

        If he suggested that it would clearly be a political motivated move. I think the current suggestions , while undoubtedly bizarre, can still be viewed from within a Keynsian policy framework and should be criticized.from an economic perspective and not as if its some sort of political move to increase government powers.
        \

    • Bob Roddis says:

      I can see a lot wrong with the macroeconomic theory behind this but I can’t argue with the logic that leads to it being proposed.

      That assumes Krugman is simply naive and confused. I think he’s a monstrous liar and he knows it.

  5. Bob Roddis says:

    While I never predicted high inflation to ensue back in 2009, I did think that Keynesianism and the war on terror had been exposed as complete nonsense responsible for our bad times and were finally finished. Never did I expect the welfare/warfare monsters to double down on their horrible policies, in the very least because I thought the public would not let them. Because there is no pushback from the brain dead citizenry, these monsters feel more secure in coming out of the closet from the formerly obscurantist form of Keynesianism and interventionism. And we must continue our bankrupting and barbarous foreign policy because the Bible says we must support Israel’s right and obligation to conquer the Middle East. I actually thought exposing these noodle-brains for what they really believed would make an impact. I was wrong.

    I also must admit that I never thought that the Keynesians would have the audacity to meticulously and continuously ignore the Austrian concept of economic calculation in the face of a constant challenge on the topic. I was wrong on that too.

    • Jonathan M.F. Catalán says:

      If Krugman got his way, I think Murphy would win his bet against Caplan.

      • skylien says:

        If Krugman had got his way maybe Bob would have won already his first bet.

  6. gofx says:

    Krugman’s catalactics of catalytic coverter Cantillon effects! Is this monetary police or fiscal policy, or just tyranny?

  7. Bob Roddis says:

    John Glaser writes that if one were looking for a way to demonstrate how faithfully the Obama administration had carried on the evil legacy of the Bush administration, this past week takes the cake:

    1. Warrantless wiretapping of American citizens;

    2. Indefinite detention without charge or trial;

    3. Targeted killings of suspects by drone, without any pretense of due process (even if they are US citizens) remains none of the American people’s business.

    http://antiwar.com/blog/2013/01/03/three-ways-obama-carried-bushs-tyrannical-torch-in-just-one-week/

    It’s just a coincidence that this all happened concurrently with the demand for the $1 trillion platinum coin.

    Rothbard was wrong, right? There’s no connection between the welfare and warfare state.

    • Mike T says:

      Bob,

      And the icing on the cake is that between Obama’s two recent appointments, the guy with the less bellicose foreign policy advocating negotiation over pre-emptive war and who places US interests over foreign interests is the “controversial” pick, while Bush’s torture guy and Obama’s assassination czar receives casual approval.

      • Bob Roddis says:

        The Keyensians, warmongers and media are all shameless but they can get away with it because the public does not know and does not care to know. Or care.

  8. Bob Roddis says:

    You wacko fringe libertarians just don’t get how cool the platinum coin idea really is. It allows the president to create money out of thin air and thereby provide a source of funding without congressional approval for his kill lists and the wars he starts without congressional approval, like the rape of Libya:

    http://www.truthistreason.net/wp-content/uploads/libya_before_after-500×358.jpg

    It’s important to bypass Congress because it’s controlled by extremist spending-cutting Republicans.

  9. William Anderson says:

    In past columns, Krugman has expressed shock that even governments pre-World War II took financial obligations seriously. For that matter, Sen. Carter Glass told FDR that his gold swindle was “Dishonor, Sir.”

    Today, we have Paul Krugman now advocating what essentially is a trillion-dollar fraud. With that kind of thinking, we might as well make Bernie Madeoff secretary of the treasury.

    http://krugman-in-wonderland.blogspot.com/2013/01/moral-obligation-fraud.html

    • Ken B says:

      These things can be very peculiar. It was just in the past couple years that Germany made the last (token) payments under the Versailles treaty.

  10. Peter says:

    I know all us Austrian geeks all scan the same sites, but for those of you that don’t, here is Bill Anderson’s take: http://krugman-in-wonderland.blogspot.com/2013/01/moral-obligation-fraud.html
    My favorite quote: ‘this is rich, calling a bond upon which the government legally could default a “moral obligation” security” ‘
    Truly a howler, Krugman is just an endless source of amusement, albeit not of the funny variety.

    I am not a Keynes connoisseur, but I don’t believe even Keynes was a particular friend of currency debasement.
    In The Economic Consequences of the Peace, chapter VI, p. 228, he states:

    Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
    Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

    I wonder therefore, what the master’s take on Krugman’s proposed “moral obligation coupon” scheme would have been. But hey , Keynes (As Krugman) changed his mind many times, the apparent prerogative (“when the facts change, I change my mind”, I believe the quote is) of the central planners. So I am sure you can come up with quotes that say the opposite.

  11. Jonathan M.F. Catalán says:

    Btw, not related to this post, but loans and leases have spiked in the past two weeks (relevant to the discussion on inflation): on Mike Norman’s blog.

    • Matt Tanous says:

      It’s all the holiday cash deals at the car dealers. That’s why I bought a car in the last two weeks. Well, that and my old one gave out for good.

  12. Philippe Bélanger says:

    Since taxes produce distortions, is not the optimal policy to have the government print all of its expenditures? The central bank can always offset unexpected shocks to the price level. That way, you would have none of the negative supply-side effects of taxes, plus a stable price level path (or ngdp level path if you are a sumnerian). I understand that as a libertarian you want to reduce spending and so do I, but as long as government is spending, isn’t the best policy to print the money?

    • Bob Murphy says:

      But PB if the Fed created enough money to fund current levels of gov’t spending, NGDP would quickly rise too much. So the solution would be to cut gov’t spending.

      • Ken B says:

        Isn’t there a differential equation lurking here then? Fund most by printing and the rest by incremental taxation on the new growth?

        I’m not suggesting this as policy, I am suggesting your answer to PB isn’t convincing.

        • Bob Murphy says:

          Ken, right now whatever the Fed earns on seignoriage, it gives to the Treasury. There’s a little margin for adjustment if you think the Fed should be inflating more than it currently is, but once you cross that, you’re done. There’s no more room to cut taxes unless you want higher inflation.

          • Max says:

            Bob, the Fed is LOSING money on seignorage (treasury yields are lower than interest on reserves).

            Although the Fed appears to be immensely profitable now, this is illusory. None of the ‘profit’ is seignorage, it’s all interest rate speculation that can go into reverse if the economy recovers (yes, the Fed is betting against the economy…which should ease the minds of people who worry about inflation. The Fed needs a bad economy to keep making its ‘profits’!)

            • Bob Murphy says:

              Max, over what period is the Fed losing money?

              • Max says:

                The Fed has been losing money on the money printing business since late 2008. It did legitimately make a large profit on the so-called bail-outs (it should have done more!)

                But I don’t consider interest rate speculation to be a legit profit making activity. It is reversible – the booked profits can turn into losses. No, it hasn’t happened yet, but do you think interest rates will be at zero forever, given the Fed’s 2% inflation target?

      • Philippe Bélanger says:

        But the Fed can offset that ngdp growth by (1) selling all the assets and bonds it has accumulated since it started QEing and (2) raising interest rates on reserves. (In an ideal situation it would create its own bonds, but that’s not in the cards.) People say no central bank has tried to inflate and failed, so I don’t see why the Fed would not be able to deflate.

        Although here we would have to take into account the distortions caused by cantillon effects, but as anyone who’s been following the blogosphere in 2012 knows, that gets very complicated very quickly…

        • Max says:

          So how is selling Fed bonds or paying interest on reserves any different than selling treasury bonds?

          • Philippe Bélanger says:

            It’s not, it’s just a way to deflate when the Fed has sold all of the assets/bonds it holds.

            • Max says:

              Ok, so let’s say the entire national debt is in the form of Fed bonds instead of treasury bonds. How does that “fund” anything? You still have to collect enough taxes to stabilize the debt/GDP ratio.

        • Bob Murphy says:

          PB, I’m being serious, ask Scott Sumner if he thinks your plan would work. My guess is that he’d say it might work for a few years while we’re in the hole, but after that you’d have to go back to tax financing.

          Krugman literally said we would risk hyperinflation if we did what you’re suggesting. Did you see that post? It was when he was arguing with the MMTers; I’ve linked it a few times.

          • Philippe Bélanger says:

            Ok, I will ask him in the comments section of his blog. I saw that Krugman post, but he was responding to people who thought printing money was never inflationary by saying that that’s only the case under a liquidity trap. (I don’t understand how Krugman can be pushing for expansionary monetary policy while at the same time saying printing money isn’t inflationary.)

    • Max says:

      PB, assuming by “print” you mean fix interest rates at 0%, then the central bank won’t be able to promise price stability. The price level will be determined by fiscal policy. And if the policy is to allow debt/GDP to go to infinity, then the price level goes to infinity also.

    • Major_Freedom says:

      Philippe, without taxation, the force that ultimately backstops the state’s paper as money would disappear, and people would eventually (and probably quickly) no longer accept them as money any more.

      Taxation is required so as to coax people into going out and finding fiat paper in order to pay taxes. After all, even if people only accepted gold, they’ll still have to pay taxes in state paper.

      • MamMoTh says:

        May the force of MMT remain with you

  13. Max says:

    I’m puzzled by Krugman’s statement that mortgage backed bonds (guaranteed by the government) are risky for the Fed. They can only be safer than treasury bonds, which are backed by nothing but taxes.

    • Jonathan M.F. Catalán says:

      Treasury bonds are considered riskless not only because of taxes, but because at worst the government can print money to meet their obligations. OTOH, mortgage backed securities are only as good as the stream of income from them, which after the crisis is suspect.

      • Max says:

        “Treasury bonds are considered riskless not only because of taxes, but because at worst the government can print money to meet their obligations.”

        That’s irrelevant when considering the risk of the bonds *to the Fed*. The Fed can’t avoid risk by printing money. :-)

        “OTOH, mortgage backed securities are only as good as the stream of income from them, which after the crisis is suspect.”

        No, the mortgage bonds the Fed is buying are government guaranteed.

        • Jonathan M.F. Catalán says:

          But Krugman is also referring to non-agency MBS’ that the Fed purchased in bulk during its liquidity swap program with illiquid banks. Regarding treasury bonds, the Fed isn’t obligated to pay them. If treasury bonds are safe for the private sector then they’re safe for the Fed. The only thing that matters is the expectations of government maintaining the initial contract.

  14. Matt Tanous says:

    If I am paid in gold, I have to pay taxes based on the market value of that gold, and not the face value of the coins.

    If the government prints a platinum coin, it can issue dollar bills in proportion with the face value, and not the market value, of the coin.

    Forget that. Such rank hypocrisy might turn my non-violent avoidance of state force into non-violent resistance instead. Unlike the members of one of my favorite Christian rock bands (http://www.youtube.com/watch?v=Q889bPDgfsI) and Dr. Murphy, I am not a pacifist.

  15. Tel says:

    It should be clearly stated on the coupons that the government has no, repeat no, legal obligation to pay anything at all; you see, they’re not debt, and therefore don’t count against the debt limit. But that shouldn’t keep them from having substantial market value….

    This should be “clearly stated” on Social Security as well.

    Actually, I’m kind of curious how many buyers they would get for these “clearly stated” coupons. I mean, on what basis is the US going to be any less broke in a year’s time? Maybe we would finally get a real market estimate of what government debt is worth… I think Krugman has come up with a good idea on this one.

  16. konst says:

    It’s like I said before. When the Fed/government creates “money”, it’s not really money and should be analyzed as having different properties. What may be a better description is that it is a claim on products and producers of free market goods and services. In other words it’s a covert form of slavery. I think a good name for Fed “money created out of thin air” is a sklav (from the Greek word sklavos which means slave).

  17. Andrew_M_Garland says:

    Robert Murphy: “That is just the barest step removed from having the Fed literally create new money to cover the government’s spending.”

    The Fed is already monetizing government spending. There is some question about exactly how much.

    ( http://www.zerohedge.com/contributed/2012-12-23/real-reasons-fed-announced-qe-4 )
    The Real Reasons the Fed Announced QE 4
    === ===
    On December 12, the US Federal Reserve surprised yet again by announcing QE 4: a program through which it would purchase $45 billion of US Treasuries every month.

    Between this program and the Fed’s QE 3 Program announced in September, the Fed will be monetizing $85 billion worth of assets every month ($45 billion worth of Treasuries and $40 billion worth of Mortgage Backed Securities) ad infinitum.
    === ===

    So, 12 * $45 B = $540 B of debt monetization for 2013, about half of the projected deficit. The effect of the other $40 B in mortgage bond purchases is unclear. It monetizes government debt to the extent that those bonds are not worth what is paid for them.

    The Federal Reserve is printing money for half of projected 2013 US Treasury borrowing.

  18. Ash says:

    Is there anything legally stopping the Treasury from selling some second-hand office furniture to the Fed for $1 trillion? Or “rent” it out to the Fed for that amount?

    • Strat says:

      lol. good one.

    • Tel says:

      But Ash, that can’t work…

      With such a lot of old junk on the balance sheet, the Fed would really be struggling to put together an exit strategy.

  19. JP Koning says:

    Bob, if it makes you feel better, Krugman’s plan wouldn’t work since the Fed can’t buy debt directly from the government. It can only buy government debt on the open market. And it would be unlikely that the market would accept such wonkish coupons to begin with.

    As for the platinum coin scheme, I don’t think Bernanke would let it fly since…

    1. the practice of passing collectors coins at their intrinsic value, not their face value, is already well established in practice and by law. Look at how gold Eagles trade. No one, let alone Bernanke, would be expected to accept a platinum coin at its $1T face value.

    2. the Federal Reserve Act forces Bernanke to acquire the appropriate amount of collateral for each Federal Reserve note issued. A coin with an intrinsic value of $1,500 is not appropriate collateral for $1T in notes/deposits.

    See my post here.

  20. MamMoTh says:

    Let’s not forget the 1T coin is another brilliant contribution of MMT

    http://www.wired.com/business/2013/01/trillion-dollar-coin-inventor/

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