2013-01-10

After All That "Soul-Searching" We're Talking About A $1 Trillion Coin

A short time ago, Paul Krugman acknowledged the shortcomings of his ideological companions in a screed against Robert Murphy, as follows:
The fact is that while Keynesians predicting a fast recovery weren’t really relying on their models, the failure of that fast recovery has nonetheless prompted quite a lot of soul-searching and rethinking. It is now standard, in a way that it wasn’t before, to argue that recessions that follow financial crises have a very different time path of recovery from other recessions, and that debt overhang, in particular, poses special problems.
Of course, those of us who have been following "the economics blogo-sphere" since about 2006 could point to dozens of other navel-gazing articles and blog posts discussing the economic identity crisis (and accompanying Austrian School revival) that has been playing out in the minds of all the self-congratulating, well-educated economists out there. "We failed," they say. "We're sorry," they say. "We shall reassess our methodology," they say, "and find out where we went wrong."

So, six years played out in front of us all. Six years went by while Paul Krugman criticized everyone, Brad DeLong criticized everyone who wasn't Paul Krugman, The Ludwig von Mises Institute made a name for itself by sneering at the fatally conceited knaves who continue to solve economic problems using math, and the folks at The Big Picture and Zero Hedge and Euro-Pacific Capital waxed long and hard about how to make money in these zany times of ours.

But, through it all, for six solid years, we were assured that economists were soul-searching, reassessing, coming out stronger than ever before. Six years down the road, what do we have to show for it?

Well, after six years, it appears that economists have given us two new, big ideas through which they propose to solve this crisis and future crises:
  1. Nominal GDP level targeting. This is a process by which the Federal Reserve prints as much money as possible, delivers it to banks, and does everything in its power to make sure that the price level increases by a certain percentage per year. Some say 2%. Some say 4%. Who cares? The point is to convince the economy that, no matter what else may be going on, the money supply will increase as much as possible to allow for a given percentage increase in nominal spending - whether that means pure inflation or real growth. Who cares? What's important is that NGDP increases. That's the only thing that matters. If you don't get it, then NGDP. QED.
  2. The $1 Trillion Coin. This is a process by which the government pays off all its debt by creating a platinum coin worth $1 trillion and using it to pay off the national debt. But this wouldn't occur by virtue of the fact that the government has $1 trillion worth of platinum lying around. (For, if it did, we wouldn't have a national debt. We'd just sell the platinum and pay off the debt. The coin would be a needless extra step. Everyone gets that, right?) Instead, the government would mint a coin with a small amount of platinum in it - an affordable amount, a trivial amount - and then say, "I hereby declare this coin to be worth $1 trillion. Here you go, guys, here's a coin I made to pay off the debt. So we're good, right?"
I have discussed point #1 a few times before, so right now I want to focus on this platinum coin idea.

Problems With A $1 Trillion Coin
The first problem I see with a $1 trillion coin is that I am not aware of any vending machine in the country that takes that denomination of coin, not even the ones that sell cigarettes. So whoever gets stuck with this coin will have a hard time using it without first getting it changed at the bank.

The second problem I see is that I am not aware of any bank that has $1 trillion in available reserves, except for the one holding the $1 trillion coin. So let's say you open up a bank account to store your new-found $1 trillion dollars. You get a receipt from the bank teller, and the receipt reads:
Account Balance: $1,000,000,000,000.00
Available Balance: $0.00
Typically, when you transfer money into a new bank account, this sort of thing is common. You deposit whatever money - via check or money order - into your new account and the check has to "clear" before your balance becomes available. But coins don't have to "clear" because coins are just pure cash. But, as I mentioned above, the bank does not have access to any vending machines that accept $1 trillion coins, so for the time being there is not much the bank can do by way of offering you an available balance. Until such time as it can spend your coin on its own investments, you're screwed.

The third problem I see is that there are only two places the bank will be able to spend its $1 trillion coin:
  1. The Federal Reserve, where the bank can buy US Treasury Bills (i.e. government debt).
  2. The bond market, where the bank can buy $1 trillion in US bonds (i.e. government debt).
Conclusion
I don't want to sound stupid here, but a lot of serious economists are seriously entertaining the idea that we can pay off government debt with a token that can only be redeemed for more government debt. So at the risk of sounding stupid, let me ask the question bubbling up in everyone's mind...

How is this $1 trillion coin supposed to avoid hyper-inflation a la the Weimar Republic or Zimbabwe? How exactly is this $1 trillion coin supposed to result in anything other than disaster?

The economics profession engaged in six solid years of soul-searching and navel-gazing and meditating and self-flagellation, and this is what the Nobel Laureates are arguing for.

WTF is going on here???