Tuesday, January 8, 2013

Moral Obligation Fraud

One of the hallmarks of Keynesian "economics" is the view that one does not differentiate between a real and a paper asset. Paper currency is just as valuable as, say, gold coins and a heck of a lot better, since one can more easily reproduce paper money. Likewise, Keynesians are quick to jump on the "print-money" bandwagon as a quick fix for dealing with a real economic crisis, including the demand that governments essentially defraud its citizens.

Paul Krugman has done this whole thing one better as he calls for the Obama administration to engage in financial fraud under the guise of "moral obligation bonds." Yes, this is the same Paul Krugman who in the past has called for criminal investigations for Wall Street executives (except for Jon Corzine, who was a Democrat politician, so it doesn't matter how badly he defrauded his clients), but the amount of financial fraud in Krugman's proposal would dwarf anything that the most dishonest people in the financial markets had done. Indeed, Bernie Madeoff has slain his thousands and Krugman his tens of thousands.

Before I explain why I believe Krugman is demanding financial fraud, let us examine his own words. He writes:
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. Consider, for example, the fact that the government has no legal responsibility for guaranteeing the debt of Fannie and Freddie; nonetheless, it is widely believed that there is an implicit guarantee (because there is!), and this is very much reflected in the price of that debt.

One must admit that this is rich, calling a bond upon which the government legally could default a "moral obligation" security. (And don't forget that the government, even if it paid back this loan, would essentially default via the "magic" of inflation.) This from a person who in past columns has marveled that governments in the past actually took financial obligations and financial treaties seriously.

But it gets even better, as Krugman writes:
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?
 In other words, the Fed can pretend that what essentially are political securities has real value. That is financial fraud, period. People have gone to prison for much less. And lest one think I have misread Krugman, he gives us this gem:
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.
 So, instead of facing the hard reality that the government cannot spend at current levels given the ability of the U.S. economy to produce enough tax revenues, Krugman claims that we can fix our problems by having Treasury and the Fed pull more rabbits from their proverbial hats. Call it what you wish, but this is fraud by every legal and moral definition. It also is the hallmark of Keynesian "economics."


Curt- said...

It's hard to imagine anyone so utterly ignorant of economics as Paul Krugman.

Pulverized Concepts said...

Let's face it, the most important thing in the northern half of the western hemisphere of planet earth is the capability of the US government to spend as much as it wants, regardless of how much it collects in taxes. The creation of the income tax, the federal reserve system itself, Bretton Woods and pathetic Nixon's severing of the monetary link with gold were all mechanisms to allow the feds to issue unlimited checks. Such is the reasoning behind the platinum coin. The Keyniesian/MMT theory that the medium of exchange is a state creation, unrelated to wealth and amendable to the political requirements of the state, gets more absurd every day.

Bob Roddis said...

The MMTers are out of control, which is good.


Keynesianism has been successful through obfuscation. MMTers being explicitly idiotic is helpful to the cause of the good guys.


Mule Rider said...

The Keynesian/Krugmanite-crowd have just about reached the pinnacle of arrogance, irony, and hypocrisy with this recent display of absurdity. To think, the same people who are so snide and dismissive of Austrian thought as "fringe" and "gimmicky" are trotting out ideas such as issuing trillion dollar platinum coins and "moral oblication coupons" to help solve our fiscal madness. Those go beyond fringe and gimmicky into unadultered, deranged madness.

Jim Bovard said...

Excellent analysis. Glad you're riding herd on this rascal, Bill.

Bob Roddis said...

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.

Dinero said...

If government enterprises are not revenue restrained, buying goods and services with its own debt free printed money, then, pivate enterprise , not having access to the same free funding cannot compete.
In such a situation goverment activity would replace all private enterprise.

Wolfgang Bohringer said...

Commentor Nick Badalamenti at EPJ has the right idea:


Isn't the big elephant in the room the question as to why they don't use gold at current dollar value per ounce?

What's the difference between them using a Platinum coin or a Zinc alloy? They could polish a turd and denominate it for a trillion dollars and it would be the same deal.

It's not like they are fashioning a coin at prevailing market value of its metal content to match its trillion dollar denomination. What a load of crap.

Aren't these green/brown backers embarrassed by their own choice of using a precious metal (albeit a tiny amount) for their token instrument for which they will use the police power of the state to impute value into the subjective minds of every human being on the planet currently under the domination of the U.S. dollar empire? By choosing a barbarous relic, aren't they inadvertently acknowledging that their nonsensensical non-theories of value are somewhat lacking?

I agree with commentor Rudi Dekkers at EPJ. If this idea gains steam, we must join with and outbid the the green/brown-backers and make them ask themselves, "Why a platinum coin":

I love the idea of the polished turd. Brilliant! If Nadler and the neo-greenbackers (or-brownbackers?) get momentum with this, then we must outbid them and demand that a $2 trillion polished turd be issued. Ron Paul should welcome this as a chance to coalition with the money cranksters--because finally we'll have a precise definition of the dollar after all those hearings where he struggled to get Bernancke to define what a dollar was.

Anonymous said...

From Bogart:
I would like to thank the countries that loan the USA money for allowing the US Government to devalue its currency. I would like to give special thanks to the governments Japan and China for the volume of such loans when your own citizens are paying the price. But I reserve my greatest gratitude to the tiny nations of Europe and most for Luxembourg where the brilliant investors in their central bank have amassed investments in USA Treasuries Securities of over $230,000 PER PERSON.

I would also like to thank the aforementioned governments for their part in allowing the USA to create massive mal-investments that have yet to be realized which has given credence to the crackpot theories of people like Krugman.

bryand said...

I did some quick math, like finding total platinum stock and multiply 1 trillion to said total platinum. well if my calculations are correct they could have 180 quintillion dollars. that should fund the U.S gov for about 1 year considering how they spend money.

bryand said...

I am not saying I agree with the trillion dollar coin option. I am just saying if you do not care about how money is made why not just go overboard with that stupid logic.

Tel said...

I have a half-trillion dollar Zimbabwe note as a collectable, so I'll be very excited when the US trillion dollar coin goes up for auction some time down the track. They would make a good set.

What I want to know is, right after Obama stamps this coin, who is he going to get to accept it? Presumably he will hand it to the Social Security managers and say, "There you go."

What I also want to know is, what will be the open market value for these "Moral Obligation" notes? Hmmm, what makes me think there isn't going to be an open market...