In a special to The Globe and Mail, Canadian economist and Richard Ivey School of Business Assistant Professor Mike Moffatt has made the monumental mistake of endorsing the $1-trillion coin idea as economically sound.
In case you missed, here is the back story. The US government currently spends approximately $1-trillion more than it confiscates from private citizens through taxation. In order to meet its spending obligations, it borrows money to come up with the shortfall. It does this by selling government bonds. However, it has also designated a self-imposed borrowing limit, called the debt ceiling.
Once again, the debt ceiling limit is fast approaching. Because of the extent of the political gridlock in Washington, advocates of the status quo are frightened about the possibility that Congress may refuse to permit further borrowing. This would force the government to either drastically reduce spending or admit bankruptcy. Predictably, rather than rein in out-of-control government spending, these individuals would prefer to endlessly “kick the can down the road.”
Enter the idea of a $1-trillion dollar coin. Since the US Treasury is permitted to mint coins, these advocates of big government have encouraged Obama to leapfrog the credit markets and mint a single coin denominated for one trillion dollars. This coin could then be deposited at the Federal Reserve in exchange for cold, hard cash. Deficit solved. Debt ceiling crisis averted. Cue the applause, ladies and gentlemen. These economic maestros have created something for nothing.
Referring to the plan as an “elegant idea,” Professor Moffatt proceeds to write:
The move, by itself, would substantially increase the U.S. money supply and almost certainly be inflationary. The Federal Reserve would likely offset such a move by selling a large number of their bond holdings for cash, thereby creating an offsetting reduction in the money supply. If there is no net increase in the money supply, there should be no direct economic consequences.
Oh, I see. The Federal Reserve will simply sell $1-trillion of government bonds and the government will go on its merry way.
Not so fast. The Federal Reserve already monetizes the majority of US debt. In fact, Bloomberg reported in December 2012 that the Federal Reserve is now purchasing about 90% of all new government bonds. This suggests that interest in US sovereign debt is waning, and with good reason. If the Federal Reserve, threatened with imminent hyperinflation, is forced to sell bonds under these circumstances, who in their right mind is going to buy them? Prospective investors would know full well that they stood to be repaid in depreciated dollars that were conjured from nothing and don’t buy anything.
If these suckers exist, could someone invite them to my garage sale?
Ultimately, Moffatt is suggesting that the economics of the $1-trillion coin idea are sound if one assumes as true something that could not possibly be true. This is the economic equivalent of misplacing your keys in the attic and searching for them in the kitchen because the lighting is better.