Trillion Dollar Coin Reveals the Monetary System in Death Throes
I’m thrilled that the trillion dollar coin idea is being taken seriously by the establishment. Not because I think it is a viable solution to the national debt, necessarily, but because it shows just how close our monetary system is to reform.
First, for those not familiar with the trillion dollar coin; the idea is that the U.S. Treasury can coin any monetary value they want for whatever purpose they choose.
In this case the idea has been floated to Obama to avert the mandatory raising of the debt ceiling by coining a trillion dollar coin. In other words, Obama can use the coin to pay off a trillion in debt to allow an increase in federal spending without Congress’ approval.
Some economists argue that it is essentially creating more money out of thin air and thus will cause inflation. Other economists claim that since no new money is being put into circulation, no inflation will result. So who’s right?
They’re both right to a certain degree. Inflation occurs when there’s an expansion in the supply of money. The two best examples of how this works are the housing bubble and the college tuition bubble (and soon-to-be healthcare bubble).
In both these cases unnatural (not free market) amounts of money were injected directly into those sectors of the economy and the result was massive inflation. Put another way, there was a rapid expansion in the supply of money to those industries.
Housing Bubble: With restrictions loosened on the banks and the government guaranteeing loans, incredible amounts of easy subprime money flooded the real estate market in the mid-1990s resulting in an unprecedented increase in property prices until the bubble popped in 2007.
College Tuition Bubble: Since the US government took over student loans from the free market and made them readily available to any warm body who desired to go to college, the price of tuition exploded compared to the general rate of inflation due to new but previously nonexistent “demand”.
But, you may ask, the Fed has been printing incredible amounts of money including trillions in bailouts, so why haven’t we seen runaway inflation in the overall economy?
The answer is that that money never reached the real economy. It was just absorbed by toxic paper and used to scrub the books at the banks. Sure, some of that money crept into the economy (mostly in the form of banker bonuses) and some inflation has occurred from the bailouts.
This is the concept behind why the trillion dollar coin will not cause inflation; because it will simply be absorbed by the government’s toxic debt and not enter the real economy. However, the purpose of the coin is to allow the government to increase spending by a larger margin than they previously would be permitted, thus eventually resulting in inflation when that new money is spent.
In summary, bailouts of debt do not cause inflation by themselves; spending of new money into the real economy causes inflation. That is why they can’t directly bailout the people without causing massive inflation.
Supporters of big government spending like Paul Krugman hail the coin as a creative way to “solve” the debt ceiling problem. Meanwhile, deficit and inflation hawks call the idea stupid and point to inflation.
Interestingly, during the last debt ceiling debate, leading inflation hawk Ron Paul proposed a similarly creative solution that received far less attention. Paul suggested that the Federal Reserve just write off their nearly $2-trillion part of the national debt that they hold. Paul stated that since the Fed is our central bank we essentially owe the money to ourselves.
Funny, I don’t remember any Austrian economists calling Paul’s idea stupid even though it accomplished the exact same thing that the trillion dollar coin does. In truth Paul’s idea was more about revealing the Ponzi nature of the monetary system and the true nature of the Fed than as an actual solution.
Both cases of the coin or a Fed write-off reveal the fraudulent nature of the so-called debt crisis or even the urgency in having to raise taxes. If these tools exist, why do we need to pay taxes at all? That is an important question Michael Snyder addressed in a recent article.
The point is that our monetary system in relation to government spending is so broken that fringe ideas like the trillion dollar coin are actually being taken seriously. It represents a signpost of approaching monetary reform.
Yet the motivation is to allow even more government spending, which is in just as much need of reform as the monetary system. We can’t fix one without the other.
Most of all, the trillion dollar coin represents an opportunity for the public to learn how phony the entire system is; that crises aren’t really crises at all, and that austerity is unnecessary enslavement.
When that sinks in people may begin to wonder why the monetary system works the way it does and what it could be replaced with.