Last week Nobel-prize-winning economist Paul Krugman argued for the Treasury Dept. to manufacture a trillion-dollar coin to address the nation’s debt issue. (This raises rather serious questions about how the Nobel-prize in economics is being awarded, but that is not the topic of this blog.) Our focus is on the wisdom of the trillion-dollar coin idea.
As background information, we note that in 1913 the Federal Reserve was created, and was given the authority to print money. In general the U.S. Treasury cannot print money, but there is a loophole in the law that allows the Treasury to manufacture coins. And, thus the brainstorm: Print a trillion-dollar coin and use that to take care of the government’s debt problem.
Crazy as the trillion-dollar coin idea sounds, it really isn’t that different than what is happening anyway. After all, presently the Treasury prints up bonds and then sells them to the Federal Reserve. And where does the Federal Reserve get the money to buy the bonds? It creates it out of thin air! After the Federal Reserve has made new money and bought the bonds, the U.S. government then owes the Fed. But there is a catch—when the bonds mature, the Fed must remit its profits back to the Treasury. After all this back and forth occurs, the end result is that new money is created to finance government spending, just as surely as if the Treasury mints trillion dollar coins. So, what the heck—since money is simply being created either way, maybe the Treasury should go ahead and crank up operations down at the mint. Since the government has had recent success at stealing output through money creation, they might as well double down on the counterfeiting operation.
How can such nonsense be stopped? We need Capital as Money.