The Trillion Dollar Coin – This Is How Money Dies

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Since the trillion dollar coin solution to the nation’s fast-approaching debt ceiling crisis has been drowning out just about everything else in the financial media in recent days, weighing in on the subject seemed like a good idea since, well, everyone else seems to be doing it as shown below via Google Trends.

Trillion Dollar Coin Search

Coming from more of a hard money background, the whole idea is, at first, easy to just chuckle loudly about and then move on. But, when you realize how serious some people are about this and how many of them are in a position to potentially influence policy, then it becomes a different matter.

For anyone who has, somehow, managed to avoid reading about this, a Huffington Post story by Mark Gongloff does a pretty good job of filling in the details in a light-hearted way. In short, to avoid a showdown with Republicans over raising the debt ceiling, the White House could legally instruct the Treasury Department to create one or more platinum coins with a face value of $1 trillion and give this to the Federal Reserve. The Fed would then credit the Treasury’s account with a cool trillion dollars that could then be spent, thus eliminating the need to issue new debt that would violate the debt ceiling laws.

As an aside, after reading dozens of stories about this, one of the most surprising things is that a lot of people seem to think that you actually need $1 trillion worth of platinum to do this.

That question is routinely answered in many of the commentaries, so I presume it’s been asked a lot, but I can’t for the life of me figure out why. I don’t know if there’s a trillion dollars worth of platinum in the world and, if so, whether or not it would fit inside an Olympic sized swimming pool, but the more disturbing aspect of these inquiries is that people must think that our money is backed with something.

It’s not and it hasn’t been for over 40 years.

The government can, basically, put any dollar value on any piece of metal or paper it wants to and it will be accepted as legal tender in that amount.

As another aside, it’s worth pointing out that you can take a one ounce gold coin minted by the U.S. government to a bank and, since it says $50 on it, in theory, they’ll credit your account by that amount if you ask to deposit it since it is legal tender. Alternatively, you could take that same coin down to the local coin shop and the man behind the counter will eyeball it and then give you cash or a check for almost $1,700, so, there is already a precedent for a gaping difference between face value and “melt value” – the trillion dollar platinum coin just takes this to a whole new, absurd level.

Anyway, the basic argument in favor of creating such a coin is that, though it’s absurd, it’s equally as absurd as the GOP holding the nation hostage to the debt ceiling since the new debt that requires the raising of said ceiling is simply covering expenses that have already been authorized by Congress.

That’s a nice argument and, sadly, we seem to have reached a new level of absurdity in the nation’s capital when it comes to budget matters, but it misses more important points about trust and the nature of money.

Many modern day economists view money as simply a unit of exchange and posit that money can be created by central banks in whatever quantity deemed necessary for whatever purpose they choose. Moreover, in our current “liquidity trap” environment, creating money out of thin air in amounts never dreamed of before has become common place.

From this perspective, printing a trillion dollar coin isn’t really anything new and, what’s actually kind of astonishing about it is that creating a trillion dollar coin will actually require much more work than what is required for the Federal Reserve to create another trillion dollars or so over the next year to buy mortgage bonds and Treasuries as part of their QE3/QE4 programs.

The Fed will just enter a few keystrokes and – voila! – it will have “created” money that it will credit to the account of some big bank in exchange for mortgage debt or U.S. government debt. Meanwhile, for the U.S. Mint to “create” a trillion dollar coin this year, it will have to spend untold thousands of dollars on design meetings, tooling, etc. in order to actually mint the coin.

This, by itself, is an indication that we’ve entered a brave new world of thinking about what money is and, importantly, we are now about as far away from “sound money” as we’ve ever been.

That’s what this debate should really be about – what is money?

Clearly, economists who favor the trillion dollar coin think that money is simply a unit of exchange that need not serve as a particularly good long-term store of value and that this “fiat” money requires no relationship with any underlying asset. Instead of being backed by a scarce commodity such as gold, today’s economists and policy makers are so smart that, unlike any who have tried it over the last few thousand years, they truly believe that they can manage a pure fiat money system over a very  long period of time.

Well, history has yet to pass judgment on this 40+ year old experiment with pure paper money and those thinking that it can endure another 40 years (or even another four years) might have a look back at what’s happened in recent years – the system appears to be falling apart at the seams.

Since decades of rapid credit expansion came to an end in 2008, policy makers have taken more and more drastic measures to prop up the financial system, most of them involving printing or borrowing more money.

As far as inflation goes – one of the main arguments against the coin – so far, so good.

As Joe Weisenthal at Business Insider noted the other day, the U.S. has no problem borrowing money at super-low rates and this chart is provided as evidence of such – the more we borrow, the lower our rates:

Interst Rates and U.S. Debt

Most economists and all trillion dollar coin advocates aren’t concerned about the idea that the U.S. is “the best horse in the glue factory” and have concluded from charts like the one above that the U.S. can print or borrow as much money as it desires, for whatever reason.

It’s hard to argue against that conclusion if one were to extrapolate from recent events, but reality doesn’t always follow that path and this brings us to the second important point here – trust.

Without anything “backing” money, modern fiat currencies are based on trust – faith in the government issuing the currency to act responsibly.

Issuing a trillion dollar coin doesn’t do much for bolstering trust.

In fact, what it does is draw attention to how absurd the current monetary system has become.

This is how money dies – by irresponsible governments causing confidence in their paper money to waver.

It’s happened over and over throughout history, yet some think this time will be different.

Once trust is gone, it’s terribly difficult to get back and this process is already underway as evidenced by emerging market central banks around the world buying 500 or more tonnes of gold last year, swapping out their U.S. dollars and euros for a yellow metal that just sits idle in some vault.

It’s a slippery slope and a trillion dollar coin would be a big slide down it.

Source: Iacono Research

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About Tim Iacono