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January 09, 2013 9:39 AM Inflation and Morality

By Ed Kilgore

I don’t know if the “platinum coin” scheme is strictly legal, and I don’t know if its deployment would freak out people whose freakouts tend to produce things like financial panics and mass unemployment. But there’s something remarkably honest about it, other than its utility in getting around deeply irresponsible people in Congress who think threatening a debt default is a good way to force Obama and Democrats to cooperate in the first steps towards repealing the New Deal and Great Society programs.

The magic coin is a pretty straightforward example of inflation—literally “printing money,” as conservative scolds like to say.

Now as a purely economic phenomenon, the propriety of inflation right now entirely depends on your perspective about why the economy is lagging. Here’s Paul Krugman patiently repeating the arguments he’s been making for years now, though this time in the context of the platinum coin:

[W]e’re in a liquidity trap, with market interest rates on short-term federal debt near zero. Under these conditions, issuing short-term debt and just “printing money” (actually, crediting banks with additional reserves that they can convert into paper cash if they choose) are completely equivalent in their effect, so even huge increases in the monetary base (reserves plus cash) aren’t inflationary at all.
And if you’re tempted to deny this diagnosis, I have to ask, what would it take to convince you? The other side of this debate has been predicting runaway inflation for more than four years, as the monetary base has tripled. The same people predicted soaring interest rates from government borrowing. Meanwhile, the liquidity-trap people like me predicted what would actually happen: low inflation and low rates. This has to be the most decisive real-world test of opposing theories ever.

But opposition to “printing money” has never been strictly about economics or the “real world”—it has been, for eons, a moral issue to those who believe anything that makes life easier for debt and debtors must be morally ruinous to the individuals and the society that benefit. Go back and read the arguments made for the gold standard during the nineteenth century, or look at the famous Thomas Nast cartoons depicting the desire for an expanded money supply a “rag baby” with monstrous implications:

It’s really no different that John Boehner’s recent statement that he grew up with a horror of debt; it’s something he doesn’t “do.”

This is a parallel phenomenon, of course, to the more general alignment of conservatives with the feeling that those hurt by the Great Recession were people—often those people—who didn’t adequately prepare themselves for adversity, and/or forfeited any sympathy by depending on government for mortgage assistance or other needs. Let’s not forget that before recession assumed its eventually massive proportions, it was common to hear conservatives say a recession would be a good moral tonic for the country, not only squeezing speculation out of the economy but validating the superior virtue of people whose ample means meant living beyond them would be virtually impossible.

A lot of that moralism has now been transferred to debt-and-deficit-hawkery. Indeed, scratch a deficit hawk, and you will often very quickly find a disdain for the “indiscipline” of debtors, of those who insufficiently save, of those who aren’t as prudent and responsible as the deficit hawk.

The interesting thing about the platinum coin proposal is that it flushes all those sentiments right out into the open where they can be addressed head on.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • BillFromPA on January 09, 2013 9:57 AM:

    Morality over the debt is no different than all forms of morality as seen by so called conservatives. It's always a case of , 'Morality for thee but not for me'.

  • bleh on January 09, 2013 10:01 AM:

    Unfortunately, they can't be "addressed head-on" precisely because it is a "moral issue."

    Part of what makes dealing with the Teahadists, and the Republicans generally, these days is that they treat politics and public policy like religion: a matter of "belief" rather than facts, and absolutes rather than compromises.

    It's a "religious war" approach. It might work for elections, at least until it consumes itself, but it definitely does not work for pluralistic governance.

    The deductive conclusion regarding the deficit issue is, of course, "good luck with that."

  • c u n d gulag on January 09, 2013 10:01 AM:

    The economist's and punTWIT's who clammored on and on about debt and austerity, finally got a chance to see how well their theories worked out in Europe.
    Not well.
    In a word: "SH*TTY!!!"

    Here's a tepid mea culpa from the IMF's chief economist:
    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/03/an-amazing-mea-culpa-from-the-imfs-chief-economist-on-austerity/

    Of course, Olivier Blanchard doesn't come right out and say, "OOOOOPS! MY BAD! I built that - austerity." Or, rather tore something down.

    I say, make the damn coin, and have Obama show it at the State of the Union speech.

    The face of it should have the dual heads of Reagan, and W, with his arrogant, petulant, smirk.
    And on the back, The Twin Towers burning.
    And the words:
    'Tax Cuts for the Rich.'
    'Wars and occupations of Afghanistan and Iraq.'
    '"Mission Accomplished" - LOL!'
    'Big Pharma Giveaway.'
    And, finally, "Deregulation of Wall Street, and the Bush Depression."

    Yeah, I know - it'll have to be a pretty big coin.

    Well, that's ok, we've had a pretty big Recession/Depression.

  • Perspecticus on January 09, 2013 10:03 AM:

    "This has to be the most decisive real-world test of opposing theories ever."

    Sure, if you want to ignore 30 years of the proven failure of supply-side economics. And what makes Mr. Krugman think that incontrovertible proof of failure of an idea is enough to squash that idea, anyway?

  • Shane Taylor on January 09, 2013 10:05 AM:

    A vital but neglected point. In _The Search for Order, 1877-1920_, the historian Robert Wiebe said, "throughout the nineteenth century a great many looked upon economic downturns as a moral judgement, precise punishment for the country's sins." Wiebe elaborated on page 4:

    http://books.google.com/books?id=Z9rbwNu_LYUC&lpg=PP1&pg=PA4#v=onepage&q&f=false

    That is more or less how my Teavangelical relatives described our current crisis.

  • Josef K on January 09, 2013 10:13 AM:

    I don’t know if the “platinum coin” scheme is strictly legal, and I don’t know if its deployment would freak out people whose freakouts tend to produce things like financial panics and mass unemployment.

    According to a former director of the US Mint (and co-author the law in question), its completely and wholly legal.

    http://www.dailykos.com/story/2013/01/08/1177211/-Co-author-of-platinum-coin-law-weighs-in-on-trillion-dollar-coin?detail=hide

    The magic coin is a pretty straightforward example of inflation—literally “printing money,” as conservative scolds like to say.

    According to Mr. Diel, this isn't so much "printing money" as much as "an accounting gimmick".

    The key point is that the coin would never actually enter circulation. The Mint strikes the coin, its immediately shipped to the Fed and $1 Trillion is entered on the ledgers, which is promptly transferred to the general fund to finance the expeditures already made. Once the debt limit is raised, the coin is shipped back to the Mint and melted down, whereupon the accounting is reveresed.

    That's it. Simple as pie.

    Is this how the law was intended to work? Of course not! But then, is Congress supposed to risk our nation's economy in the service of a delusional ideology? I'd certainly take any novel loop-hole available to prevent that from happening.

  • Peter C on January 09, 2013 10:16 AM:

    For a minority in Congress to force us into default by preventing the President from borrowing money to spend (as he is bound by law to spend) is DEEPLY IRRESPONSIBLE. The budget we live under is law which passed Congress and was signed by the President; it is the law which President Obama is obligated to administer. In order to follow the law, the spending must occur. With Republicans refusing to allow the borrowing necessary, the minting of a coin is not a 'scheme'; it is the responsible thing to do.

    Defecits scolds should sit down and shut up about the morality of debt; that debate was settled with the passing of the budget. If they want lower debt, they need to PASS A DIFFERENT BUDGET! If they can't, that is THEIR failure, not ours!

    If Congress wants to nullify a law; it must pass a new law. It can't nullify a law through inaction or by throwing a tantrum or by holding its breath until they all turn blue and pass out.

    Obama should mint the coin now so we can all move on from this idiocy. When Congress passes out, their autonomic nervous system will kick in that they will unconciously begin breathing again.

  • bigtuna on January 09, 2013 10:22 AM:

    Boner's comments were beyond ridiculous. 1950's Ohioahs did do debt? 1950's corporations didn't have bonds? I grew up in the midwest, and my parents bought their first house in 1962 with a $10,000 loan from a savings and loan. Everyone did.

    The message machines for the know nothing party is taking charge, again. I wish someone would point out that:

    1. CONGRESS VOTES on BUDGETS; While the president can propose a budget, what comes out of congress is actually, umm, what is that ... ah, yes - THE LAW. With leeway, this is what the executive spends.

    2. SO a know nothing dominated House sort of approves, in its disfunctional way, various budgets, with continuning resolutions, or whatever, what is to be spent. This spending is in deficit. But, it is CONGRESS that voted on it. CONGRESS INSTRUCTED the executive branch to spend in deficit mode. It had its chance to bring things into current balance at this point, but did not, It failed to produce a budget in balance [and we'll say nothing here regarding the issues of financing the long term debt, which presumably adds to the debt ceiling in ways that I don't understand].

    3. AND then the know nothings turn around and threaten to cap the debt ceiling.
    This is like a putting on a condom after the fact.

    Didn't a recent poll find that people like cockroaches more than Congress?

  • c u n d gulag on January 09, 2013 10:25 AM:

    May I humbly suggest a new title for the conservative economists who believe(d) in "Austerity:"

    Wreckonomists.
    Or, Wreck-onomists, if you prefer.

  • Gov't Mule on January 09, 2013 10:34 AM:

    The trillion dollar coin is NOT inflationary. The money never goes into circulation.

  • Walker on January 09, 2013 10:39 AM:

    I want the platinum coin because the heist movies they make about it will be AWESOME.

    Heck, they might even do a Bond sequel to Goldfinger. Though what is a catchy title with platinum?

  • Gummo on January 09, 2013 10:46 AM:

    I want the platinum coin because the heist movies they make about it will be AWESOME.

    Hell, YES!

    This may be the best comment I've seen on this whole sorry mess.

  • T2 on January 09, 2013 10:47 AM:

    this is completely a Conservative/Republican ploy to devil Obama. Nothing more, nothing less. It would be exceedingly helpful if the Media would tell people that. It would be exceedingly helpful if the Media would explain that the Debt Ceiling is a loan to pay off money already spent by Congress (GOP and Dem). It would be exceedingly helpful if the Media would outline ALL the PORK contained in the money allocated by Congress that have put us in debt. Instead, the Media is assisting the GOP in fanning this as an Obama problem to solve. Pretty much all the problems these days can be traced back to the Media consistently ignoring the truth.

  • hilzoy on January 09, 2013 10:47 AM:

    Ed: I don't think this is right: "The magic coin is a pretty straightforward example of inflation -- literally "printing money", as conservative scolds like to say." More precisely, I think it needs to be qualified.

    It is a straightforward example of inflating *the money supply*. But as I understand it, it would not produce what people normally mean when they talk about inflation: an inflation *in prices*, at least assuming that the Fed keeps the coin until the Congress raises the debt ceiling, at which point the Fed issues debt to cover costs as usual, hands back the coin, and Treasury melts it.

  • Josef K on January 09, 2013 10:56 AM:

    From Peter C at 10:16 AM:

    The budget we live under is law which passed Congress and was signed by the President; it is the law which President Obama is obligated to administer. In order to follow the law, the spending must occur.

    One small point: the spending has already occurred. The funds just have to be made available on the books to cover it (hence, the need for the coin).


  • Barbara on January 09, 2013 11:21 AM:

    http://www.nytimes.com/2013/01/09/business/a-bold-dissenter-at-the-fed-hoping-his-doubts-are-wrong.html?ref=business&_r=0

    The President of the Federal Reserve Bank in Richmond has "warned repeatedly that the central bank’s extraordinary efforts to stimulate growth are ineffective and inappropriate and, worst of all, that the Fed is undermining its hard-won ability to control inflation."

    He keeps hoping his concerns will be wrong -- and fortunately for him all of his hopes for being wrong have been completely validated, year after year, and even now, he won't admit that he was, in fact, wrong because "sometimes when you test the limits you find out where the limits are by breaking through and going too far."

    I noted a wedding ring on his left hand. I wondered what he would make of my matrimonial corollary: No one should ever get married because you don't really know whether your spouse is worth it and you might get divorced.

    This is about what you are willing to risk, and what values are willing to take risks for. Mr. Lacker isn't willing to take risks for the unemployed and other victims of the recession. He denies it, but he doesn't even need to allow hope to triumph over experience -- he just needs to let experience teach him a lesson. And even then, he won't do it.

    Let's hear it for the platinum coin -- a stupid solution to combat stupid people.

  • T-Rex on January 09, 2013 11:24 AM:

    Now wait a minute. Why should the sort of people who advocate the gold standard have any objection to platinum coinage? Doesn't platinum have a higher intrinsic value than gold? The platinum coin would be "real money," as opposed to inflationary paper money, yes, yes?

    Or are they tacitly admitting that there is really no such thing as intrinsic value, and that the value of any unit of money, whether it's platinum, gold, silver, paper, or bytes in an ATM, depends on the value we agree to believe it has?

  • arkie on January 09, 2013 11:29 AM:

    Movie title: From Boehner with Love

  • emjayay on January 09, 2013 11:30 AM:

    The whole deficit brouhahah would not exist if we had been Keynsians all along instead of just after Wall Street managed to crash the economy. I don't know how far we could have gone in paying off the existing federal debt during the years of Bush II instead of greatly adding to it, but if you imagine a continuance of Clinton tax rates and no Iraq war etc. we could have maybe at least paid off the tripling of national debt under Saint Ronnie. To put it another way: Bush II was an unbelieveably stupid idiot.

    If Congress had been responsible over the years including keeping the Defense Department down to half its current size maybe we would have ended up in 2008 with money in the bank or at least little or no national debt. Then no one (well, given Obama Derangement Syndrome, fewer) would be screaming for four years about borrowing a whole bunch of money to fix the crash.

    I know it's random and meaningless, but the Captcha is "bowels Fedvacy".

  • JM917 on January 09, 2013 12:11 PM:

    @ C U N D:

    Right on the [funny] money!

    I especially love the prompt to Obama to brandish a trillion-buck coin (Reagan/Bush mugs and all) during his State of the Union.

  • Keith M Ellis on January 09, 2013 12:18 PM:

    "The trillion dollar coin is NOT inflationary. The money never goes into circulation."

    No, that's incorrect. The coin is deposited at the Fed into the Treasury's account, with which the US then pays bills. In doing so, that's putting those funds into circulation.

    This would be inflationary, all else being equal. But all else isn't equal.

    First, the Keynesian zero-lower-bound view of a demand-constrained economy says that inflationary increases in the money supply will not be inflationary exactly insofar as it takes up that slack. This is why the stimulus and quantitative easing haven't been inflationary, despite the predictions by hard-money types that they would be.

    Second, there's a modern monetary theory view that it wouldn't be inflationary even outside these narrow zero-lower-bound conditions. I don't believe this, but this group has some increasing influence and you can think of them as sort of the opposite side of the continuum of the hard-money austrian types.

    Third, because the Fed has bought and owns an enormous amount of Treasuries as part of its quantitative easing, then it could just sell off an exactly corresponding amount of them to offset either the deposit of the coin (not optimal) or as those funds are spent (optimal), thus making it inflationary neutral. This is just what is normally done when the debt ceiling is raised: the Treasury Dept. issues and sells off a corresponding amount of bonds as the new authorized debt, and the Federal Reserve issues new currency to match it. But, really, we want inflationary pressure now so it would be best if the Treasury didn't bother. Not the least because the subsequent lack of inflation will confound the hard-money types.

  • iyoumeweus on January 09, 2013 12:27 PM:

    THE LAWS OF ECONOMICS
    FIRST LAW: Money, wealth, capital, etc. can be created and destroyed
    SECOND LAW: Money, wealth, capital, etc. is only useful when it is creating something useful to or for society, the nation or a culture.
    THIRD LAW: As wealth is taken out of a society and made unavailable through gambling, speculation or other means social disorder increases.
    FORTH LAW: Money, wealth, capital, etc flows upward and if not stirred becomes stagnant.
    FIFTH LAW: When consumption increases, employment increases, and vis-a- versa.

  • Josef K on January 09, 2013 1:50 PM:

    From Keith M Ellis at 12:18 PM:

    "The trillion dollar coin is NOT inflationary. The money never goes into circulation."

    No, that's incorrect. The coin is deposited at the Fed into the Treasury's account, with which the US then pays bills. In doing so, that's putting those funds into circulation.

    With respect, the first one is correct. The funds have already been spent, and this is just a very clever little accounting gimmick. The monies it represents are already in circulation.

  • mattski on January 09, 2013 3:12 PM:

    Joseph K,

    No, I don't think that's right. What is the danger of default under your scenario?

    Seems to me that without the coin bondholders don't get paid, and government programs/contracts don't either.

  • John on January 09, 2013 4:22 PM:

    The coin is not inflationary. This is not new spending. President Obama could mint a $100T coin and it would have just the same effect.

    When we have full employment and full utilization of plants and equipment then additional government spending can be inflationary.

  • Josef K on January 09, 2013 4:52 PM:

    From mattski at 3:12 PM:

    Joseph K,

    No, I don't think that's right. What is the danger of default under your scenario?

    Seems to me that without the coin bondholders don't get paid, and government programs/contracts don't either.

    First, there is no default because the coin provides the necessary funds (albeit in a rather roundabout manner).

    Second, there are no bondholders involved here, and as far as the Fed is concerned the US government has provided enough of a deposit into its account to meet its obligations. The fact said deposit was created by order of the White House, rather than the allowance of Congress, is immaterial to the Fed.

    Again, I believe the coin is simply an accounting gimmick practiced between the Treasury and the Fed. We shoudln't think of this as cash money; I doubt heavily anyone would believe the coin itself is the genuine article if someone tried to deposit it into their bank.

  • Keith M Ellis on January 09, 2013 5:03 PM:

    "The coin is not inflationary. This is not new spending."

    If it weren't "new" spending, then there wouldn't be any need for it. Because it's used for spending.

    The entire point of this is to put funds into the Treasury's account at the Federal Reserve Bank without doing so as a result of selling debt. Normally, this is done by the Treasury Department selling treasury securities (debt), the proceeds of which it deposits into its account at the Federal Reserve Bank, and from which the funds are actually spent.

    What you're probably thinking of is that none of this involves any new appropriations, which Congress controls. But this is all about the fact that when the government takes in less revenue than it pays in expenses, either on a daily basis or longer term, it can only meets those expenses by issuing debt and using the proceeds. But Congress also sets an upper limit to the issuance of debt; so if the Treasury's account is run down and then, on some given day there's not enough coming into the account to meet that day's payments, then in the lack of a new debt ceiling authorization from Congress, the government simply won't be able to pay its bills that day. Which is bad; but even worse is if that amount in the account doesn't even include the debt service, forcing a default.

    But the main point is that you're fundamentally mistaken. This is about actually having money in the government's account to pay its bills on a daily basis. When it pays those bills via funds from a trillion dollar coin that it just minted and deposited into its own account, that's putting those funds into circulation directly for the first time because they hadn't previously been in circulation and thus this represents an immediate increase in the monetary base. (To the degree to which those funds are spent, which is more like twenty billion a day, or so, not one trillion.)

    Normally, it doesn't work this way. The Fed just supplies issued currency to the banks as needed. It doesn't print bills and "hand" them to the government. The Fed just meets the banking demand for money. When Treasury sells debt in the form of t-bills, the money that they accept for it implicitly becomes demand for an increase in the monetary base which the Fed satisfies by actually printing currency and/or adjusting the member banks' reserve accounts. In this roundabout sense, the US government increases the monetary base, and so eventually the practical effect is the same as with the coin. Which is why the coin can easily be, and will be, converted to Treasury-issued debt at the first opportunity after the debt ceiling is increased.

  • joe on January 10, 2013 11:12 AM:

    "If it weren't "new" spending, then there wouldn't be any need for it. Because it's used for spending."

    That's true if you consider savings and consumption the same thing.

    But they're not -- one is shifting credit around, accounting magic, and the other is actually transferring goods from a producer to a consumer. They're only the same thing if you consider saying "You're a bad boy" and pounding a boy on the head with a rock the same thing -- in other words, either a lawyer or a philosopher.

  • joe on January 10, 2013 11:28 AM:

    "But this is all about the fact that when the government takes in less revenue than it pays in expenses, either on a daily basis or longer term, it can only meets those expenses by issuing debt and using the proceeds."

    You didn't understand the MMT guys at all. The government first and foremost prints a fiat currency. It creates demand for that currency by collecting taxes --- that tax collection is also a tool to control the size of the currency pool. Governments can also lend money (print) or borrow money (absorb). You and I have an accounts balance --- governments with sovereign debts in fiat moneys do not.

    Now, in fact, the money promised by the government is as good as printing the bills --- that promise is in itself a currency used before the promise is fulfilled. A government contract is almost as liquid as cash in terms of loans, unless the government is collapsing (ergo, hyperinflation).

    The promise to print is (almost) the same as printing --- in fact, credits are filled out which determine the real monetary base. There is no gold in them thar hills --- there's no magic actual money supply, but only the nominal money supply in accounting books everywhere.

    This case just balances it so that the promise doesn't evaporate, crashing the economic system. It shows the accounting "will to print", in a kind of Nietzchean way. The monetary base would contract if you don't do this --- credits will disappear that have been nominally (in peoples books) written down.

    That's all the money supply is --- not bills, but an integration over accounting books, including informal pocket accounts.

  • stephen p wigginton on January 10, 2013 1:09 PM:

    movie title- doctors no

  • jimmywitz on January 10, 2013 2:36 PM:

    @Joe: Thank you sir! That is a perfect description of our money system. The problem is that 90% of our representatives in Congress do not have the slightest idea what you're talking about! And 95% of the "punditocracy" do not have a clue either. So we have a national dialogue where we are talking about "balancing budgets like Mom and Pop do at home" and coming to "obvious conclusions about "fiscal responsibility". And if you want to know how that kind of nonsense eventually ends up, you have only to see the damage and destruction they are doing to the poor people in Europe.

  • Keith M Ellis on January 10, 2013 5:17 PM:

    "Now, in fact, the money promised by the government is as good as printing the bills --- that promise is in itself a currency used before the promise is fulfilled. A government contract is almost as liquid as cash in terms of loans, unless the government is collapsing (ergo, hyperinflation)."

    Ah, that's a good argument. It's not precisely the MMT argument, either.

    But I am a neo-keynesian, not an MMT person. So I'm still inclined to see the monetary base from the other direction.

    I think your argument is more likely to confuse than enlighten with regard to anyone below our level of familiarity of the relevant subjects. You are at least implicitly, perhaps explicitly, arguing that the only alternative to your MMT view is a hard-money austrian view. Which isn't true.

    At any rate, we agree that in practical terms, the coin won't be inflationary.

  • mattski on January 11, 2013 12:07 AM:

    •the government first and foremost prints a fiat currency. It creates demand for that currency by collecting taxes•

    It's one thing to have an appealing theory. It's another thing to confuse the theory with the real world. Just to take an obvious point, the demand for fiat currency grows organically from the social history of money. Or put differently, the demand for money derives primarily from the utility of money. Not taxation. True, we need cash to pay our taxes, but we need cash to buy our groceries even more so.

    Money is an extremely useful social convention. Getting mesmerized by its quasi-illusory nature doesn't increase ones understanding.

  • HMDK on January 11, 2013 9:30 AM:

    It's curious how it's often the same people railing against debt, who try to lure people INTO debt. "Hey, I know you're having a though time, so let me lend you some money", followed, after they accept, by "You filthy weakling, you went into debt!". A great scam.