"What backs the money?" he asked. "Debt," I replied. He and the other students looked at me with astonishment, as they understood instinctively that debt had "value" of dubious worth, and that such a system meant the government could expand the monetary base into oblivion. At that moment, they understood that the USA had essentially a fraudulent monetary system. And, yes, they showed anger, lots of it.
Paul Krugman would have thought them to be a bunch of crazies. Money, after all, is nothing more than a tool that aids a "social system" and that governments can and should manipulate its supply and its value over time in order to help achieve certain social "goals." Anyone who thinks differently, according to Krugman, is certifiably crazy, a nut job.
While he does not explicitly endorse the newest rabbit-from-the-hat scheme in his most recent column, nonetheless he says that it might be necessary because "crazies" in Congress (some Republicans) believe that we cannot continue to borrow money forever and want President Obama to put a lid on spending scheme. Now, I am the first to say that many of these Republicans are delusional but for a different reason than what Krugman claims.
Most Republicans are "hawks" when it comes to U.S. military adventures overseas, and that has been painfully apparent in the discussion over the nomination of Chuck Hagel for U.S. Secretary of Defense. While a U.S. Senator, the Nebraska Republican spoke out against the vast expansion of military spending and the wars in Iraq, Afghanistan, and elsewhere. He also denounced the beating of war drums against Iran, something that has incensed many conservatives who apparently are itching to bomb Tehran and expand U.S. Middle East wars.
I cannot denounce the rightist mindset on war enough. The same people who once decried Soviet military spending now are blind to the fact that even though the USA spends more on its military budget than the rest of the governments of the world combined, that isn't enough, and that any cutback, no matter how small, means that "we are not safe."
Yes, I think it is good that the Republicans at least are talking about entitlements, although I wish they would also deal with the agricultural subsidies and all of the other corporate welfare that has their fingerprints all over it. Since the Democrats have "discovered" that a lot of military spending also comes in the form of welfare, they definitely have become less vocal in their historical opposition (at least following the Vietnam War) to Pentagon spending.
In other words, I don't look at the Republicans as the "good guys" seeking to be financially responsible when, in fact, they are a major part of the problem. However, Krugman denounces the Republicans not for their hypocritical stance on military spending, but rather because they are even asking the hard questions on whether or not we can continue this "borrow-from-Peter-to-pay-Paul" finance scheme. As Krugman sees it, the irresponsibility is not in those that seek to spend and borrow as through the future does not exist, but in those that say we have to stop this madness.
So, what does he do? He endorses what essentially is a money-printing scheme to get around the hard choices and hard discussion. Are we borrowing 40 cents for every dollar the federal government spends? No problem. Just strike a coin with an announced "value," and that will take care of everything. Continue the financial shell games as though one day the economy magically will turn around, get "traction," and then prosperity will return.
I'm on a list serve with a number of Austrians, and one person, a writer and editor, had this to say, and I believe his words are spot on:
The really amazing thing to me in all this is how EVERY commenter I'm seeing, savvy political or supposedly serious economist, acts as if the actual real physical economy where real goods and services are produced seemingly doesn't play into this at all---this debate seems to me to be revealing an apparent actual lack of understanding that money is not the same thing as wealth.Keynesians would denounce this person as being a rube, an ignoramus, someone who does not "understand economics." Yet, the opposite is true. He is not the one who is delusional. People who pretend that we can spend as though we are much wealthier than we really are truly are the people who are deluded.
The only way it doesn't reveal that is if -- and this is what i'm trying to be sure I understand -- the trillion dollar coin solution is NOT economically significant if we are already in a world of fiat money. That is, a sort of, "Well, if you accept fiat money at all, this coin nonsense is just as good a means to make money from nothing as any other."
Very lucid and explanatory. Thank you. As for your students of 30 years ago, "out of the mouths of babes..." Krugman's antipathy to the Republicans is, I think, just part of his economist-as-carnival-barker routine. He's decided to be stupidly partisan in order to provoke and draw attention to himself, since he can never get enough attention to satisfy himself. The Austrian comment is exactly right: we've moved into a world where the "social convenience" of money has parted company with the underlying wealth it's supposed to represent, so that the "symbol" of wealth is now seen as the same as wealth itself. And in such a world, a trillion dollar platinum coin begins to make sense. As Nietzsche said, madness in individuals is rare, but in whole societies, it is the norm. I think we're definitely getting there.
The trillion dollar coin gimmick really isn't any different than Quantitative Easing or any other money-from-nothing counterfeiting scheme. It's just a simpler and more obvious form of the scam. It begs the question "Why not a 1 googolplex coin?" Hey, go big or go home right? For that matter why does it have to be a platinum coin? Just make it a lead slug with the inscription "Never Give A Sucker An Even Break".
As silly as the coin scheme is, I think most commentators (including you) are entirely missing the point on this... This is ostensively just a gimmick to go around the debt ceiling legislation and does not have any economic significance whatsoever... The point is simply to "technically" reduce the debt so the gov can borrow some more and not a monetary expansion scheme per se ... Economically speaking , this scheme is good or bad in the exact same proportion that effectively removing the debt ceiling is good or bad and, apart from crazy optics, has the same effect as striking down the debt ceiling law..
What I find interesting is that everyone is commenting fervently on the supposed economic effects of this and not so much on the political fact that the executive is very publicly considering a barely-legal non-legislative scheme to effectively circumvent the law of the land... If this goes through, the executive effectively gains the ability to borrow without upper bound by executive fiat, and that,I think, is the scary part...
I think your last point is well taken, but it goes further than even that. Supposedly, the Federal Reserve System and its legal relationship with the government is structured so that the government cannot have a direct money-printing scheme. (The Fed buys bonds in the secondary market, not the primary one.)
Furthermore, we supposedly have safeguards to keep the government from just borrowing wily-nily and making a mockery of "sound" financial practices. Yet, as you point out, here we are ready to perform yet another trick, as though financial tricks actually trump real production of real goods and services.
You Neanderthals gotta get with the program. Commodity money is so passe'. With commodity money some folks just don't have enough to make their contribution to the economy. In fact, the idea that printing money to pay people to dig holes and fill them up again doesn't go far enough. Shovels are cheap items produced with a minimum of physical labor. You can probably buy a pretty decent shovel for $25, maybe $75 if you're the government. And each shovel wielder could only remove and replace perhaps 3/4 yard of dirt a day, if the breaks could be kept to a minimum. Anyway, we got spectacular equipment now, like the Caterpillar 374DL hydraulic excavator, that can dig up 6 cu. yards in one dip. And it takes a lot more guys in the factory to put one of those babies together, too. So for around one million clams Uncle Sam can buy one of those things and really dig some holes. It's called productivity. And if you don't believe me, ask Nancy Pelosi.
And another thing. Why is it that the federal government, even though it owns no end of stuff, has to tax the citizens and borrow money to finance the National Endowment for the Arts? Geez, they own practically all of Nevada and the western states. How about auctioning some of that off before they come up with all these crazy money schemes? I wouldn't mind a section or so in Glacier Park.
Why give away title to land when they still own all of us, all our property, and any property we might produce in our lifetimes? Isn't that what "full faith and credit" really means?
"The surest way to destroy a nation is to debauch its currency."
Vladimir Ilyich Lenin
Currency issued in exchange for bonds is backed by the goods and services created by the bond issuer in the process of earning the money to repay the bond.
As much as I would like to see a sensible resolution to America's fiscal issues I don't think we're going to see one until the financial system completely collapses. There's too much ideological gridlock in Washington for that to happen: the Democrats don't want to cut the welfare state, and the Republicans won't budge on military spending. The public, for the most part, has been panicked into believing that the world will end if you cut spending on either item.
This scenario will continue to play out much as it is now, with all sorts of wacky suggestions like trillion dollar coins, until the very day that America's creditors say "no more" and we have a catastrophic run on the currency.
Even up until a year prior to the collapse of the Soviet Union, no mainstream commentator seriously entertained the idea that it could collapse. The consensus was that the Soviet Union was "too big to fail" until the very moment that it failed.
Since then, these same pundits have whined that the collapse happened too quickly. But slowing down the collapse would have required instituting proactive measures years earlier, measures for which a consensus simply did not exist. It's no different in today's America.
Actually, the demise of the Soviet Union was predicted by the incredible Judy Shelton. Don't miss this: http://www.youtube.com/watch?v=5f8QpKktgtM
"People who pretend that we can spend as though we are much wealthier than we really are truly are the people who are deluded."
I really liked this part. Thanks a ton.
Krugman is wrong to say that it is not an "inflationary exercise in printing money" as the assets sold by the Fed in his explanation would no longer be performing the role of retiring base money.
As you might expect, the MMTers love the platinum coin idea. I explained to them:
Using treasury debt, our preposterous funny money system will continue to appear obscure, mysterious and incomprehensible to average people. Using the coin, the system would appear preposterous to average people who might begin to understand it as a purposeful system of theft and fraud. The powers-that-be know this. Only MMTers don’t.
University of Chicago law professor Eric Posner, son of Judge Posner, suggests that the platinum coin might be found illegal using present day legal analysis (which precludes analysis of the actual meaning of the Constitution). The language of statutes is often interpreted by courts using statements that make up the legislative history of those statutes. The purpose of the statute was clearly to provide authority to the mint to strike COMMEMORATIVE platinum coins and sell them at their bullion value plus “a reasonable profit”. Further, why else would they platinum which has substantial market value. They could be made out of tin cans.
Typo above. It should have read:
Further, why else would they USE platinum which has substantial market value.? They could be made out of tin cans.
The MMTers like the coin idea because they want the treasury to be able to spend money into existence and not depend upon selling bonds or collecting taxes (and thereby cure the problem of scarcity once and for all) while getting rid of or highly regulating the ability of banks to create funny money through loans. They brag about being the source of the coin idea.
Meanwhile, both the "mainstream" Krugmanites and the MMTers deem anyone suggesting the mere slowing down of the increase in debt as extremist crazies.
Hey Bob! The Treasury department spokesman doesn't believe the coin should be produced.
Many of the readers don't seem amused if you look at the comments on the second link. The idea for the trillion dollar coin came from an MMT advocate named Beowulf on a 2010 post on Warren Mosler's blog, which you can see here.
Well, Obama has nixed the idea of using the "trillion dollar platinum coin". My opinion is that this option was not used because the coin idea is SELF EVIDENTLY PREPOSTEROUS and even brain dead Americans can see that. The current money dilution schemes like the Fed buying treasury bonds appears obscure, mysterious and incomprehensible to average people which is how the powers-that-be like it. Not so the coin.
Jon Stewart mocked the idea of the platinum coin. I doubt that he has mocked the purchase of treasuries by the Fed. This caused Krugman to go berserk:
"Above all, however, what went wrong here is a lack of professionalism on the part of Stewart and his staff. Yes, it’s a comedy show — but the jokes are supposed to be (and usually are) knowing jokes, which are funny and powerful precisely because the Daily Show people have done their homework and understand the real issues better than the alleged leaders spouting nonsense. IN THIS CASE, HOWEVER, IT’S OBVIOUS THAT NOBODY AT TDS SPENT EVEN A FEW MINUTES RESEARCHING THE TOPIC. IT WAS JUST YUK-YUK-YUK THEY’RE TALKING ABOUT A TRILLION-DOLLAR CON HAHAHA.
Hey, if we want this kind of intellectual laziness, we can just tune in to Fox.
Update: Some people are asking why I don’t go on TDS to explain. Um, first I have to be invited — which hasn’t happened since, I think, 2005."
Another NYT writer noted "A Trillion-Dollar Coin Brings a Jackpot of Jests"
Ramanam – Beowulf believes he’s from India – posted the idea within a week to Bill Mitcell’s “billy blog” on Modern Monetary Theory. Another supporter, management consultant Joe Firestone, also wrote widely about the coin idea, crediting Beowulf.
The other day, Ramanan said: However most of the people try to make it look as if we are going to do something immoral.
I told him that it is immoral etc..:
For the record, the queen of MMTers was on MSNBC saturday morning:
There's no debt crisis or unfunded liability crisis because the government can never run out of "dollars". Thanks to the MMTers (fact not theory!) we need never run out of anything, including people to change the diapers of 40 million senile baby boomers.
I'm not a genius on economics, nor particularly learned on the subject. I believe we are spending way too much on the military. But, as for entitlements, are you going to stop my 90 year old mother's meager social security? Is that what "dealing with entitlements" means? If not, count me out on that argument.
Now then, MMTers seem wacko to me, the idea of merely printing money to solve monetary problems, other than that which is necessary to the extent that money needs to be printed, old bills replaced, etc, but just to wantonly print money, as if money were wealth, and that wealth cold be conjured out of thin air, I'm not buying that idea, at all. And, I'm saying that as a democrat. But don't assume I'm with liberals on all their financial ideas. Let me ask you a question, and you tell me if I'm correct or not:
Is not the ultimate source of wealth, labor?
I ask, because, it seem to me, than in ultimate terms, from where else can wealth come?
If that is true, should we not base monetary policy thinking of money, digital or otherwise, as labor, and not as a fiat construct ( given that is' ultimate value arises out of labor ) ?
I say this, because let's reduce a transaction to it's de facto truth:
You trade your labor for currency, then you trade our currency for a product which was created by labor.
Reduce that to it's essence, and it's merely trading labor for labor.
Therefore, money is labor. That's what it is. Base monetary policy on that, and you might come up with a sane policy.
No? Am I wrong?
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