Thursday, January 10, 2013

Trillion dollar coin: a road to Hell

Two years ago, a random guy in a random discussion has pointed out that the U.S. laws have a bizarre loophole. One may circumvent the debt ceiling by printing a trillion-dollar coin out of platinum and donating it to the treasury.



I think that the laws are really silly if it matters whether the money is printed in the form of many $100 banknotes or a somewhat smaller number of $1,000,000,000,000 coins. What should matter is the total debt. However, the Treasury Department may apparently mint commemorative coins and their value isn't restricted.

Let's not get to the legal details. Someone has simply screwed it up and even though no one has found the loophole that may be abused before 2011, the Treasury Department is apparently allowed to print an arbitrary amount of money regardless of the debt ceiling as long as the format and material is appropriately chosen.




In 2011, this concept would be viewed as a joke by most folks. However, during the discussions about the fiscal cliff, the idea began to be treated seriously by many folks including Paul Krugman and Bill Gross (who modestly wants 100 coins per $10 billion only because a pizza divided to 100 pieces is too much to eat, as his blonde friends agree). The number of articles dedicated to this plan is huge and most of the writers endorse the plan. A Twitter hashtag about the coin is full of activity. More seriously, the White House hasn't ruled the idea out.

I think all of them are plain lunatics – except for Paul Krugman who is an imbecile.



The ceiling is a plane that separates the interior of a room from the exterior. At the top floor, it's followed by a roof which protects the room against precipitation and other things. ;-) It plays a rather important role. You may kiss it – like the lady above – but you shouldn't jump higher than the altitude of the ceiling if you don't want to break your stupid skull.

Similarly, the debt ceiling is what separates a somewhat safe economy from Hell. The raising of the debt ceiling has become a tradition, a regular event whose realization is a sort of formality. However, it's still a hard formality. The friction that makes this formality difficult is what assures many people that the fiscal situation of the U.S. isn't completely out of control.

The trillion-dollar coin is a sort of a drill that can make holes into the ceiling. Minting such a thing would surely be a precedent that would make it easier, and not harder, to spiral the expenses of the federal government out of control. I am sure that many lunatics and imbeciles mentioned above want nothing else than this development. But sensible Americans should think twice.

It's simply an unfortunate fact that it's more politically convenient for governments to overspend. Politicians are buying their political capital in the eyes of the current generations for the future generations' money. The debt ceiling is one of the last powers that at least regulates this insatiable desire of politicians to spend. The precedent making it possible to mint infinite-value coins means that the laws behind the debt ceiling will become irrelevant.

I can't imagine that the buyers of the U.S. treasuries would remain eternally unaware of the fact that the debt that may be borrowed by a U.S. government whose hunger isn't even regulated by any debt ceiling can never be repaid. They may hesitate for a year or two or three but they will ultimate get the point and it won't be nice. They will realize that their fellow treasury holders will realize that it's an unsustainable scheme. Therefore, they will realize that the demanded interest rates will have to skyrocket at some point, the U.S. economy will tank, and inflation will explode.

The U.S. is turning into a pupil learning from Greece – trying to be another Greece when it gets mature. All the recent hysteria about the absurd notion of a fiscal cliff shows that the U.S. politicians are not only unable to lower the debt. They're even unable to lower the rate by which the debt is increasing. They're unable to do so even if laws are telling them that they have to do so. They always prefer to change the law. In the case of the fiscal cliff, they changed the law, too. And it was before a trillion-dollar coin.

It's the "moral atmosphere" that most accurately determines what the fiscal situation of a country may look like in the medium run or the long run. And when one looks at America today, it ain't pretty. I am not making any precise prediction of the doom but I am almost certain that America is destined to financially collapse in a foreseeable future.

Wise lawmakers should try to close similar loopholes. In Czechia, someone found a less important but still interesting loophole: CDs divided to one-crown individual "tiny CDs" didn't have to pay taxes from the interest. Make no doubts about it, at some point, almost everyone was dividing their CDs and effectively saving accounts into these five-cents "securities" and the drop of the tax revenue became substantial.

All such loopholes, when they exist, were designed with the purpose of eliminating some bureaucratic hassle, the need to file tax returns because of every penny, and soon. But whenever there exists a method to enhance this "tolerance of details" into huge proportions, the law should be clarified in such a way that it's impossible to abuse the magnanimity that was supposed to apply only to small things.

In reality, I guess that the coin is unlikely to be printed. But fiscally irresponsible left-wingers and other economic crackpots will use the possibility as a way to blackmail all sensible people in the U.S. Congress and elsewhere. They may mint it, after all. Jay Carney of the White House is already doing so, in a way. It seems to me that these left-wing hacks will make the political atmosphere in Washington D.C. even more toxic than what they have achieved so far. Needless to say, if the blackmailing "we can mint the coin if you don't obey" becomes effective and the loophole won't be closed, the debt ceiling will be made irrelevant just like if the coin were actually minted. So the loophole should better be filled.

31 comments:

  1. Luboš, agreed on Krugman. In the end, he is just silly exponential ponzi-like cluless economist with Nobel prize.

    Regarding the "road to hell" - well, I think USA (and Europe and Japan), and later on the rest of the world is already there... unfortunately. But the road may be long, say decades, or even centruries...

    cheers,

    Alex

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  2. Why limit it to a trillion dollar coin. They'll just have to deposit another one next year. If they are going to do it, they should just stamp the infinity symbol on it, give it infinite value, and be done with it.

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  3. A good symbol. However, they would soon invent payments to various favorite groups that are also infinite and the balance of the U.S. government would be an indeterminate form, infinity - infinity. It could be hard to find out whether the debt ceiling laws are satisfied. ;-)

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  4. Dear AA,


    the exponential function appears at many places of science and social science and it's not true that whenever the exponential function appears, something is wrong.


    Cheers
    LM

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  5. Today, a chocolate bar costs, $1.00.

    I remember when that chocolate bar cost $0.05.

    Boil baby boil.

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  6. I remember such prices, too. It's called inflation. But it's just a changing, time-dependent unit of value or utility. There is nothing wrong with its being nonzero. Over a long enough timescale, it may become substantial whenever the rate is positive. Still, a 2% inflation rate is OK.

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  7. What astounds me is that the geniuses in both the Treasury and the Fed,
    with all their daily exposure to markets, and their heralded educations,
    don't understand that nasty, little thing we call the "pricing
    mechanism". Much less how they're completely screwed it all up.



    Who knew the catalytic converter on my car would one day be worth a cool mil? ;~)

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  8. You know the consequences of any exp. growth.

    Therefore, I detect the disconect in your response.

    " ... But this trillion-dollar coin is more a discussion about fiscal things - the growth of debt - not about the monetary ones such as inflation. "

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  9. I know the consequences of an exponential growth. X(0) is evolved into X(0)*exp(C*t), a mundane thing. I wonder whether *you* know the consequences of an exponential growth.


    Disconnect is spelled with a double "n" and I am 99.9% sure that you are unable to operationally distinguish between monetary and fiscal questions so you are just trolling and bringing fog here.

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  10. Every economic system, from barter to Keynesism to Communism, is
    man-made. The rules are simply that to which the parties involved
    agree. Right now, the entire world, from China to New Zealand, practices
    the unlimited sovereign debt model, as well as fractional reserve
    banking and fiat currency. Despite the jokes and punditry, the U.S. will
    get away with whatever scheme it wishes to continue unfettered
    government debt creation.

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  11. They need to make the coin out of an exotic alloy that requires the
    Large Hadron Collider or some other impossibly complex machinery to
    make, and then call it an Unobtainium Coin and tell people they used all
    of the Unobtainium on Earth to make that one coin. If it has the
    perceived rarity of there being only one ounce in the world, then they
    have a better chance of convincing people of its $1 trillion value.



    However, if you are going to do it as a one-time thing, to maintain
    faith in the system, you might as well give it a higher value, like $100
    Trillion, so it offsets all of the United State's unfunded liabilities
    as well as the national debt.



    Or, just make it out of Platinum and tell everyone it is Unobtainium.



    They could even have a rigged auction with shill bidders, with the
    heads of central banks from all over the world bidding on the world's
    only ounce of Unobtainium.



    Then, for stimulus, they could detect that there is an ounce of
    Unobtainium on Mars that requires a human mining team to extract.;~)



    H/T: Zero Hedge

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  12. Coming to this blog improves my learning of physics.

    Going to "the market ticker" improves my learning of finances.

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  13. Anyone who takes this “proposal” seriously is dumber than a fence post. Jay Carney, who is smarter than a fence post, obviously dismisses the idea without comment. As the Bowles Commission has pointed out, it is going to take both revenue (more taxes) and spending cuts to avoid really big problems in the years ahead.


    Simply refusing to raise the debt limit would force the government to stop paying its bills and that would hurt many innocent people as well as our national economy, the credit worthiness of the United States Government and the Republican Party. The President is in a good position to pass most of the blame onto the Republicans and he damn well knows it. His aim is to take back the House of Representatives in 2014. Let’s not help him do it.

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  14. There will be no problem with any coin, Lubos. Despite of the claims,
    the US currency is fully backed up by rare metals. The only difference
    is that now, instead of gold, they are uranium and plutonium. :-) Do you want to exchange your green-painted pieces of paper into their backing materials? Free delivery included. :->

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  15. Whatever we consume must be paid for from what we produce. There is no magic way around that.


    Whatever government consume must come out of what the rest of us produce. Money is just a medium of exchange. It is not actual wealth itself. Its value is our belief that the money we receive for our efforts can be exchanged for the things we need and want.

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  16. it is my understanding that the commemorative coins that the mint can produce without further congressional authorization, must have an actual value equal or greater than their face value - that a $1T platinum coin must contain $1T of platinum. That would kind of put a crimp in the deal.


    Ordinary circulating money - such as dimes and nickels, does not have this requirement, but before it can be issued it must be approved by congress. Sort of defeating the entire purpose of the $1T platinum coin in the first place.


    Finally there is no "magic" clause in the 14th amendment or Article I Section 8.


    Debt is Debt, no matter how it comes about.
    If Expenses - Revenue = $1T, and no actual assets are sold, then we have increased our debt by $1T.
    Minting a $1T platinum coin would only change that - if it was actually worth $1T, and if it was then there would not be a problem in the first place.

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  17. Appropriate metal? Seems like that would be Plutonium :-)

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  18. http://en.wikipedia.org/wiki/The_Trouble_with_Trillions

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  19. While I completely agree with you on the dangers of debt, I don't quite understand your claim that "The debt ceiling is one of the last powers that at least regulates this insatiable desire of politicians to spend." In my opinion, exactly the opposite is true: debt ceiling was created to make it easier for the government to spend (during the world war 2). Because of debt ceiling, the congress can create new programs and spend money without worrying if there is enough money to pay for it, since decisions about debt issuance are separate now. If there was no debt ceiling, and the congress had to approve the new debt for each new expense, I bet there was much more political pressure to not spend so much money. That's how it is in most of the rest of the world, I don't understand why it's not so in the US.

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  20. Right. The "opposite" of having a debt ceiling that I meant was clearly not that each new expense has to be approved. Instead, the "opposite" of having a debt ceiling was the inevitable consequence of the trillion dollar coins, i.e. the possibility to add expenses without any limitations whatsoever.

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  21. Your understanding is incorrect. There is absolutely nothing in the law that authorizes minting of platinum coins that requires the coins to be made of at least their face value in platinum. The law gives the Secretary of the Treasury the authority to make platinum coins of any size he sees fit and denominated in any value he sees fit. The relevant law's exact wording is, "The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time."

    And a $1 trillion platinum coin would actually be worth $1 trillion simply by virtue of being United States currency that's marked with that face value.

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  22. It is, in fact, you who are an imbecile. The debt ceiling serves absolutely no useful purpose. Voting on the debt ceiling is nothing more than Congress voting on whether it will pay for the things it has already bought. The very concept of a debt ceiling is insane.

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  23. The vote from Congress would be the original authorizations for spending.

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  24. Well, that's the demagogic leftwingers' misinterpretation of the situation with the debt ceiling. The actual reality - the purpose of all these arrangements and a necessary condition for the soundness of the country's finances - is that you shouldn't have bought things you can't afford, and things that put you into this risk surely include all the things expensive enough so that you could have hit a debt ceiling!


    Your logic is upside down and it is upside down because the starting point of your whole approach is that you are an irresponsible parasitic asshole who is always eager to waste other people's money, including the money you don't possess yet. You may say I am an imbecile but scum like you is the true disease of the global economy in 2013.

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  25. No, it's your logic (if it can even be called that) which is disconnected from reality. You can make the argument that the US Congress shouldn't have authorized all that spending. But it did, and thus is now obligated to pay for it. There are no take-backs, the spending already happened.

    Also, it's conservatives who crashed the economy in 2008, and are trying to do so again in 2013. In Europe today, we're seeing (again) that austerity only makes things worse. We're not particularly eager to import that failed idea to the US.

    BTW, I can't help but notice that the Czech Republic doesn't have a debt ceiling. Your country seems to get along without it, so why do you think mine should have one?

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  26. The long-term solution would just be to end the absurdity that is the debt ceiling.

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  27. That only addresses the supply side of the equation. For the value of the coin to truly be a $ trillion the demand would have to be very high, there is no demand for such a coin, so no matter what material it would be made from its true value would be very low.

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  28. I have a hundred trillion dollar Zimbabwe bill to remind me of what hyperinflation means.
    This was legal currency.

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  29. Krugman is yet another example of the bizarre decisions of the Nobel committee recently. He is a self-aggrandizing source of noise.

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  30. I agree in one respect: this coin is a cheat. However, realize that its not just left wing economists who want to overspend! Republicans love it too, just their hobbies are different, like going someplace looking for weapons of mass destruction. Reagan actually won the cold war forcing the soviets to follow suit with army spending, but I don't think he was the one doing the calculation.
    America is different from Greece in a key point: so far we all buy dollars, so they just print it for us.

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