Saturday, January 12, 2013

A Note on Paul Krugman and What the Government Does Now Instead of Minting a Trillion Dollar Platinum Coin

Modern day second hand dealers in ideas continue to begin discussion about a platinum coin, that could be used to create an end around the debt ceiling, with a knowing chuckle. The chuckle implies that it is an absurd idea, something our government would never do, but fun to talk about.

Do these second hand dealers have any idea what goes on between the Treasury and the Fed now?

Instead, of using platinum, the Treasury prints, on paper, dollar denominations. These "securities," which go once through the public wash, are then often bought by the Fed.  Currently, the Fed owns $1.6 trillion of the Treasury printed paper. This is 60% more than the amount the second hand dealer chuckle at when a trillion dollar platinum coin is suggested be minted by the Treasury.

Except for a few minor technicalities, there really isn't much difference between what the Treasury and Fed do now, and what the minting of a trillion dollar platinum coin would do. The fact that the second hand dealers fail to grasp this, and that they are never called on this, is a sad commentary on the ability of most Americans to think more than two steps deep on economic and political issues.

This is not a new phenomena in American intellectual discourse. Henry Hazlitt's great book, Economics in One Lesson, first published more than 50 years ago, was about this very topic. Hazlitt discussed in the book the failure to consider an economic problem fully. That is, those that charge, for example, that it is good for an economy when a vandal breaks a window, because a window maker now has more work, fails to take into consideration where the victim of the broken window would have spent the money otherwise. In other words, the broken window is a negative for an economy, and this point can be obviously seen if one thinks deeply enough about the problem.

Among modern day economists who display this inability to think deeply, Paul Krugman leads the pack. Not surprisingly, he was among the group of second hand dealers in ideas, who early on promoted the trillion dollar platinum coin. He called the idea "silly" and a "gimmick," but was still in favor of it, though there has been no indication in his comments about the coin that he understood that there is little difference between the minting of such a coin and the current printing of Treasury "securities" on paper. This should not come as a surprise. Krugman, through out his columns, seems to have an inability to think more than two steps deep. Indeed, in his writings he has admitted that he was greatly influenced in his core thinking about economics, by a journal paper on a baby sitting co-op that used coupons. But, from his writings about the co-op, it is clear that Krugman does not think deep enough and fails to comprehend how the coupons issued by the co-op are different from money. It is this failure to think deeply that is at the core of his inability to get many economic concepts correct.

I am not kidding when I write that Krugman holds his misunderstanding of the babysitting co-op story as the basis of his economic views. In 1998, Krugman wrote in Slate of an "earth shattering" experience, the reading of the co-op story:
Twenty years ago I read a story that changed my life. I think about that story often; it helps me to stay calm in the face of crisis, to remain hopeful in times of depression, and to resist the pull of fatalism and pessimism.
In his recent book, End This Depression Now!Krugman devotes a full chapter (chapter 2) to the babysitting co-op and in that chapter again displays his inability to think more than two steps deep.

For my commentary on Krugman's misunderstanding of the co-op story, see:

 Now Krugman on Mises Monetary Mental Disorder

The Krugman Economic View Built on a House of Babysitting Coupons

In Review: Paul Krugman's New Book


  1. I've abstained from commenting on the ridiculous idea of a trillion dollar coin, so far. But here's my question: "Wouldn't the Treasury (or the Fed) need to buy a trillion dollars worth of platinum in order to mint it?" So, wouldn't the get further in debt by doing so?

    1. No, that's the "rub". The fact is has to be platinum is because the law was written in intent for bullion/numismatic purposes, but they have the power to DENOMINATE it at any value.

      So they could make a 1 oz coin and disregard the market price of platinum and denominate its value as $1 trillion.

      That's part of the absurdity. Taking into the account that actual copper pennys and silver quarters are worth way more than their denominated value(which is why they aren't in circulation any more, just like the currenet nickel is soon to go away for one with cheaper alloys) it makes sense to the Keynesians.

      I think if this happens it will be yet another chink in their armor as the common man is starting to catch on....and if this coin is minted its going to really set them to thinking.

    2. The quick answer is no. It would be a coin with a nominal value. It could be anything, really, but the reason it would have to be a platinum coin is due to a quirk in the law for minting collectible coins.

      My question is, what would be the effect of monetizing this much debt as once on the nominal value of my silver coins?

  2. Ray Stevens, Economics in One Lesson or How I Learned to Love My Printing Press.

  3. Hey Paul, maybe you could be a bean counter at one of these stores in Belarus. You have a money brain, right?

    In May 2011, Belarus surprised its citizens by devaluing its currency by 50% overnight in an attempt to kickstart its economy, leading to swift and brutal hyperinflation. And while written narratives of the most recent episode of monetary collapse are one thing, nothing is quite as amusing, and grounding for those attempting to "value" money (such as Nobel prize winning economists writing out of their steel exoskeletal ivory towers), as watching a bag of cash be used to pay for seven boxes of beer. And nothing is quite a cathartic as spending several hours trying to count said cash - cash backed by the "full faith and credit" of the Belarus central bank...

  4. "though there has been no indication in his comments about the coin that he understood that there is little difference between the minting of such a coin and the current printing of Treasury "securities" on paper."

    You haven't been reading Krugman then.

    "Remember that the coin is supposed to be deposited at the Fed, which is effectively just a semi-autonomous government agency. As the federal government proper drew on its new Fed account, the Fed would probably respond by selling off some of its $3 trillion balance sheet. In effect, the consolidated federal government, including the Fed, would be financing its operations by selling debt instruments, just as always.

    But what if the Fed decided not to shrink its outside balance sheet? Even so, under current conditions it would make no difference — because we’re in a liquidity trap, with market interest rates on short-term federal debt near zero. Under these conditions, issuing short-term debt and just “printing money” (actually, crediting banks with additional reserves that they can convert into paper cash if they choose) are completely equivalent in their effect, so even huge increases in the monetary base (reserves plus cash) aren’t inflationary at all."

    1. You are joking, right?

      Who exactly would the Fed sell a trillion of securities to?

    2. What? Do you also think the Treasury won't be able to sell a trillion securities next year if the debt ceiling isn't lifted? Why can't the Fed?