Deficit? We don't need no steenking deficit!
June 22, 2013 12:33 AM   Subscribe

Why can't the US Government just mint 17 of the trillion dollar coins and be done with it, and just pay off the whole deficit in one go?

OK let me preface this question by saying not only do I know nothing about economics, but I must be stupid since I can never seem to understand any of the concepts. So - for my sake - please explain as you would to a five year old why the US Government can't just mint 17 of the trillion dollar coins and pay off the whole debt in one swoop. Please don't tell me it is because it is illegal, because apparently it is not. Bonus points if you can include in your explanation how the US economy would not end up like 1920's Weimar Germany, with everyone pushing around wheelbarrows full of dollars to their local Wal-Mart.
posted by humpy to Law & Government (21 answers total) 11 users marked this as a favorite
The government can do that.

The reason it won't do that, at least not in the foreseeable future, is that it would cause massive inflation. You've just increased the amount of USD floating around by 17trillion so every dollar that people have would suddenly be worth a lot less. Nobody can tell you why the economy wouldn't end up like the Weimar Republic because the economy could end up like the Weimar Republic. Referring specifically to the inflation, I mean, not anything else.

Also: interest rates would skyrocket. Who would be willing to lend the government money at any reasonable interest rate if they know the government is willing to just inflate the debt away?

So the answer to your question is "the government can do what you suggest, it just won't because the side effects are worse than the disease".
posted by Justinian at 12:56 AM on June 22, 2013 [7 favorites]

Well, you can. We mint money all the time. The reason that we can keep growing our national debt, however, is because debtors place their full faith and credit in the US government's guarantee that they will service their loans by paying interest.

The trillion dollar coins wouldn't be cashable. The debt isn't held by one entity. It's held by literally millions of people and hundreds of countries. Think bonds and treasury notes and other interest-bearing devices that people purchase as investments.

So you can't just mint some coins and call it good. But you could print the paper. You can literally print paper money. $17 trillion of it. And buy back the debt. (Not necessarily legally or easily or forcibly.) But then what happens is you increase the money supply artificially by $17 trillion dollars.

This is not good. Very not good. What happens when everyone values their dollars because there are $100 trillion dollars and market forces have caused our dollars to be worth a consistent amount of goods or services that we all agree upon? We get to spend that money and know what we can buy for that money, and capitalism abounds.

What happens if, instead of there being $100 trillion dollars out there, we find out there are now $117 trillion dollars? ($100 trillion is not the total amount of money supply, this is merely an example.) Your money becomes worth less.

Your money's value is determined by, well, actually a few factors. But what we call purchasing power is indexed based on what you can buy for a given price. The Economist actually tracks purchasing power parity in Big Macs, which is to say, how many US Dollars it costs to purchase a McDonald's Big Mac in various countries. You can see exactly how much the same type of currency gets you and that reveals a lot about your purchasing power.

When currency enters the money supply rapidly, and for "no good reason" (say, the government printing itself out of debt), the market feels a shift in the supply, and the market begins to demand more of those dollars to cover the same amount of goods. Your $4.84 Big Mac now costs $5, because each of those dollars is worth less, because there are SO MANY MORE of them all at once.

This can lead to hyperinflation, which is admittedly not something that would easily happen in the US (or even happen with a $17T currency injection per se), but isn't good. Too much money enters the supply, so things cost more, so the government has to print more money to pay for the more expensive costs of things, so things cost more. It's how Zimbabwe ended up with Z$200,000,000 bills. Which bought almost nothing.

In fact, inflation was occurring so fast that people would desperately try to buy things from store shelves before the prices would change because the value of the cash they held in their hands would drop AS THEY WERE IN THE STORE. MADNESS!

Hyperinflation is just one of the reasons the government wouldn't just print itself out of debt. Someone will likely come along and explain some of the other reasons, like how you would ruin the ability to issue debt to finance your country's operations with further bonds because they won't like what you do to the currency when you do that, but I think this probably gets you started with a rough explanation.

(Disclaimer: I am not an economist. At all. I am, in fact, a college dropout.)
posted by disillusioned at 12:59 AM on June 22, 2013 [4 favorites]

Bonus points if you can include in your explanation how the US economy would not end up like 1920's Weimar Germany, with everyone pushing around wheelbarrows full of dollars to their local Wal-Mart

Well with credit cards and debit cards, you don't need a wheelbarrow to cart around your millions of worthless dollars but that is pretty much what would happen. While there are multiple factors involved in the hyperinflation in 1920s Germany and more recently in Zimbabwe, the government just printing more money to pay its debts was a big part of the problem.

If the US wants to import goods from other countries it needs its currency to have value. In very simplified terms, the stronger your currency, the more overseas buying power you have. Like all things, the value of currency is basically supply vs demand - if you increase the supply without also increasing the demand then each dollar is worth less than it was before. Lets say every single dollar currently in circulation has a combined "worth", printing more money without the economic power to back it up doesn't increase your "worth" so the value of each dollar is now worth less to account for the 17 trillion more dollars that worth is shared between. This is a very simplified example and it is of course much more complex than that in reality.

This wikipedia article goes into a lot more detail on the link between money supply and hyperinflation.
posted by missmagenta at 1:02 AM on June 22, 2013

Clarke and Dawe have covered this.
posted by flabdablet at 1:14 AM on June 22, 2013 [1 favorite]

please explain as you would to a five year old why the US Government can't just mint 17 of the trillion dollar coins and pay off the whole debt in one swoop.

Because anybody advocating this course of action is basically trying to make the economy go to eleven.
posted by flabdablet at 1:26 AM on June 22, 2013 [4 favorites]

You are mistaken in your question. The government cannot do that because it is the federal reserve that prints money, which is
an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government… it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.
This is one reason to have an independent central bank: the people cannot elect a government that has this kind of control over monetary policy, which prevents the poor from robbing the rich as in your scenario, and lends a lot more confidence to the dollar.
posted by esprit de l'escalier at 1:45 AM on June 22, 2013 [3 favorites]

You are mistaken in your question. The government cannot do that because it is the federal reserve that prints money

Yes, you're absolutely right, but I think the poster is referring to the whole strange loopholes that allows the government to print platinum coins of any denomination that where used as a way to get around the dept ceiling.

But yes, you're right. The government can't print money, only the Fed can, and they're not part of the government.
posted by gkhan at 1:58 AM on June 22, 2013

That's true, but I think the OP was pretty clearly asking about the idea of printing money to address the deficit in general.
posted by Justinian at 2:03 AM on June 22, 2013 [1 favorite]

Yes, you're absolutely right, but I think the poster is referring to the whole strange loopholes that allows the government to print platinum coins of any denomination that where used as a way to get around the dept ceiling.

I don't see why the fed wouldn't in that case work to undo whatever the government does by destroying its currency holdings to compensate… The federal reserve wants currency stability and has a lot of levers it can pull to achieve that.
posted by esprit de l'escalier at 2:31 AM on June 22, 2013 [1 favorite]

@ esprit: the fed prints money, but the Treasury Dpt mints coins, such as our hypothetical trilly coin.
posted by jpe at 4:23 AM on June 22, 2013 [1 favorite]

More recently than the Weimar Republic example, something similar contributed to the extreme hyperinflation which led to the abandonment of the Zimbabwean dollar as a form of currency. The Mugabe government printed trillions and trillions of nearly worthless dollars just to keep itself afloat, with disastrous consequences.

New York Times
posted by easy, lucky, free at 6:23 AM on June 22, 2013

Direct currency manipulation is absolute poison to national economies. Zimbabwe is the obvious example, but even Argentina is a cautionary tale.
posted by valkyryn at 6:33 AM on June 22, 2013

Response by poster: OK then it seems the consensus is that hyperinflation would result. So why do so many people think that minting the (or a couple of) trillion dollar coin(s) is a good idea? Here is just one example. Is this person flat out wrong?
posted by humpy at 7:28 AM on June 22, 2013

Ok, Mr/Ms 5 year old:

Money has only one actual real world value: It lubricates trade. It creates effeciency when you try to turn your web coding skills or writing skills into food, clothing and shelter by eliminating the "trading game" (where you go to the butcher and say "hey, I want a steak" and he doesn't want no stinking code, he wants a pile of cardboard boxes so you go to the boxmaker and he doesn't want code either, he wants apples so you go to the apple orchard guy....etc).

Which means a dollar is a proxy of value for real world goods and services. You cannot flood the market with more money while available goods and services remain constant without causing hyper-inflation. (We would, indeed, need to go to Walmart with wheelbarrels full of money if this occured.) Because you would just be dilluting the value of our existing chits. Plus what others have said here: It would do super bad things to trust in the U.S. government, etc, since they would basically be running a con job a la "I know we said if you bought U.S. savings bonds or whatever, they would be worth something in the future, but we are tired of trying to fix the real world problems y'all hired us to fix, so here is a boatload of pretty toilet paper and pretty shinies. Now get off our backs about actual problems. Mmmkay?" It would violate the current agreements we have that determine dollar value, flushing that system down the toilet.

Historically, money has been quite hard to make work. The relatively stable, relative long-standing system we have currently is a historical anomaly. Money is just a symbol of value. Other than lubricating trade, it has no inherent value. It only has as much value as we agree it has. This would up-end all current agreements and that would be A Bad Thing.

On preview: And if people are proposing this, they don't understand some fundamentals about money and reality.
posted by Michele in California at 7:48 AM on June 22, 2013

Is this person flat out wrong?

posted by flabdablet at 8:10 AM on June 22, 2013

Is this person flat out wrong?


What's more, they know they're wrong but they don't care because they have larger political goals that they think would be met by destroying the economy.
posted by aramaic at 8:12 AM on June 22, 2013 [3 favorites]

As far as I can tell there's three kinds of people who support the idea:
  1. People whose top priority is the economy, but who don't understand money very well. These people think this would be a magical solution to all our economic woes. They're wrong.
  2. People whose top priority is seeing the Democratic party score points off the Republicans, but who don't understand PR very well. These people think something like this: "Well, maybe there would be some inflation. But that's a risk I'm willing to take! The point is, it would let the Democrats win the budget debate!" There's two problems here. First, "I'm willing to destroy the economy as long as my party looks good doing it" is a fucked up thing to say. But the bigger problem is that it wouldn't really make the Democrats look good anyway. Outside the very bluest districts of the very bluest states, people would see the platinum coin thing as ludicrously funny at best, and as Dan-Brown-ishly sinister at worst. (Just imagine the field day that conspiracy nuts would have with Seventeen Top Secret Platinum Coins In A Vault At The Fed!) The Democrats would actually lose a whole lot of credibility, except maybe with a certain tiny segment of the population who are completely immersed in the HuffPo worldview and completely out of touch with political reality.
  3. People whose top priority is something completely and utterly outside the mainstream — like, say, making a symbolic point about the balance of powers between the President and Congress, or sending the world a Wake-Up-Sheeple!-type message about the arbitrariness of modern currency — and who are willing to see the current administration wreck the economy and its own credibility in order to achieve it.
That article you linked reads like a mix of #2 and #3 to me.

But so the reason the platinum coin thing won't happen is because the administration (i) has people in it who understand money, (ii) has people in it who understand PR, and (iii) cares more about the economy and good PR than about basically anything else.
posted by Now there are two. There are two _______. at 8:19 AM on June 22, 2013

Best answer: humpy: "OK then it seems the consensus is that hyperinflation would result. So why do so many people think that minting the (or a couple of) trillion dollar coin(s) is a good idea? Here is just one example. Is this person flat out wrong?"

Most of the advocates of the platinum coin idea was actually addressing a different but related problem to the debt: the debt ceiling. Members of Congress like to pretend they are against deficits, and one way they do this is by (somewhat arbitrarily) imposing a cap on the amount of US debt that is allowed to be issued by the Treasury. To oversimplify somewhat in a way that I don't think is too consequential: when the Treasury writes checks for anything and doesn't have the cash on hand, it has to issue government bonds (called Treasury bonds). Congress, over the years, has passed a number of laws instructing Treasury to put out a bunch of checks - for social security, unemployment insurance, buying tanks for DoD, paying government employees, whatever - but the debt ceiling says "you're not allowed to issue debt past some number." Whenever we get close to the debt ceiling, there is a risk that Treasury will simply have to throw up its hands and say "We can't write you a check, sorry." This would be very bad. Government employees wouldn't get paid, people on social security wouldn't get their checks, and people who have lent money to the US Government - large banks, foreign governments, and ordinary people who have invested in treasury bonds (or who have mutual funds or pension funds that do) wouldn't get a scheduled payment that the government promised them when it sold them the bond. This is functionally defaulting on debt, and even if the government tried to do some tricks like paying off bondholders first and paying for food stamps last, interest rates would skyrocket because it would be very clear that the United States couldn't necessarily be trusted to pay off its debts when it says it will. This creates a sort of debt-death-spiral effect, potentially - we have to pay higher interest rates on our new debt, which means that the amount of money we spend servicing debt goes up, which means we have to issue more debt to pay for the debt service, etc etc.

In some sense this is silly because Congress can, and often does, just raise the debt ceiling, where one side gets to say "This is the responsible thing to do, because America has a government which does what it says" and the other side that says "Deficits are awful and this is another reason why America is going down the toilet and why it's so crucial you reelect me so I can fight against these excesses." As may be obvious, my sympathy leans slightly towards the former side here, but you can understand from the answers to your original question why people are concerned about the idea of runaway debt.

So what the hell does the platinum coin idea have to do with all of this? As I understand it, the idea was just to shuffle around some assets in order to keep the Treasury from having to issue new debt. The Federal Reserve acts as a bank for the US government. They also hold a lot of US treasury debt (you can see their balance sheet here). The idea was that, due to a loophole in a law about minting coins (the loophole is explained pretty well in that link, I think), the US mint can just mint coins whenever it pleases. Obama can't force Congress to raise the debt ceiling unilaterally. He also can't (by fiat) force the Fed to print more dough. (Avoiding Zimbabwe/Weimer type situations is one reason the Federal Reserve and other central banks are designed to be independent of the fiscal side of government). But what Obama CAN do is order the mint to create a $500 billion or $1 trillion platinum coin, and then Treasury could deposit that coin in the Fed. Hey, suddenly we have a lot more cash in our bank account! We can write checks to pare that down instead of issuing debt, debt ceiling no longer a problem, Congress gets to go take a hike.

The way money affects the economy and inflation is a subject of academic debate, but I think the general consensus is that if a trillion dollars got dropped from a helicopter onto the economy, it would be inflationary for the reasons suggested upthread. The nice thing about the trillion dollar coin idea though, was that the Fed actually holds enough assets that it could offset the inflationary effects. So Treasury/the Mint creates a trillion dollars, the Fed takes a trillion dollars out of the economy to compensate (they would do this by selling off some of the assets they hold, and holding onto the cash they receive in exchange for those assets), but the debt ceiling isn't a problem for awhile. The amount of money in the economy doesn't change on net, so if you have a sort of monetarist view of inflation, there's no reason for inflation to kick up since the amount of cash in circulation is exactly the same as before. The distinction between doing this and literally paying off ALL the debt is that the Fed's balance sheet isn't big enough to offset the entire US debt, but it might be able to absorb the relatively smaller platinum coin idea once.

I think advocates of this idea are/were* either patting themselves on the back for being too clever or are trying to make a larger political point that the US debt ceiling is inane and perhaps if the Obama administration did something inane as a response to it, Congress would be shamed into not being completely stupid and forcing Treasury to default on US Debt and tank financial markets because part of the House doesn't like Obamacare or something. Operationally, the idea might have been sound.

I suspect though that it wouldn't have worked, or at least wouldn't have avoided inflation or wackiness in financial markets. People might not have believed the Fed could offset inflation, and inflation expectations could rise in a self-fulfilling way. Creditors might have thought that the government was getting desperate and started preemptively demanding higher rates of interest on US debt, putting us on the path to the death spiral. Or Congress might have interfered with all of this somehow or been so outraged that they refused to play ball out of spite.

This is already too long, and I might have been sloppy on some details, but I think that about covers the platinum coin thing. It's not quite as simple as saying the person you linked to is wrong/insane but I do think they might be wrong about this one.

*Bernanke functionally killed this idea by saying "Uh, we would not play along with that scheme" if I remember correctly. To me it's not clear he is legally allowed NOT to if the Obama admin actually tried it but I have a feeling that they never would have anyway and Ben saying "this is a dumb idea" was a good enough reason to not try.

I am an economist in training but I am not your economist and you should seek help from an economist in your jurisdiction who specializes in fiscal issues. Okay, for real though, I don't study public finance and because nobody has ever tried this exact goofy-ass scheme anything you read is necessarily somewhat speculative.
posted by dismas at 8:50 AM on June 22, 2013 [9 favorites]

and just pay off the whole deficit in one go?

As Alexander Hamilton observed, "A national debt, if it is not excessive, will be to us a national blessing." Without government debt - and the claim against future tax revenues it entails - backing the currency, the currency is worthless.
posted by three blind mice at 9:16 AM on June 22, 2013

It's a bad idea mostly because there's no need. We don't need to pay the national debt... we don't ever need to pay it. Governments are immortal, and they can chug along for centuries with a higher debt level than we have today. (The UK in the first half of the 1800s, then the most powerful and stable economy in the world, had debt at 150% of GDP.)

The platinum coin business, as dismas observes, was about the debt ceiling clash.

Also, the Fed is already more or less creating money, in the form of the quantitative easing program, currently at the rate of $85 billion a month-- which is pretty much equivalent to creating a trillion dollar coin a year. Are we hyperinflating? No, we're not hyperinflating; inflation is below the Fed's 2% target and unemployment is well above its target 6.5% level. So the economy could use more stimulus, not less. (Not 16 times the amount, though.)
posted by zompist at 6:14 PM on June 22, 2013 [1 favorite]

Response by poster: Thanks all I have marked the question as resolved. Even though it related to my secondary question, dismas' answer cleared up a lot of confusion for me. Perhaps I'll be a banker yet :-)
posted by humpy at 6:40 AM on June 23, 2013

« Older What is the best faucet-mounted water filter?   |   Check for a long-closed probate Newer »
This thread is closed to new comments.