Marie Antoinette couldn’t get her head around the concept that peasants might resent a lack of bread. I mean, look at her bedroom! So, eventually, her head was forced to observe the resentment in a more detached manner. The Versailles life-style was unsustainable, even if the people living in Versailles thought they could stall the reckoning beyond consequences to themselves. (“After me, the flood!” was supposedly the comment of Louis XV.) And it turned out that Louis XVI was just a bit slow in realizing how quickly the sky could rain all over them.
America had its own brief “let them eat cake” moment earlier this month before the Federal Reserve put a stop to the insanity. Apparently beginning with a discussion in the blogosphere, and eventually migrating to discussions by such pundits as Ezra Klein in the Washington Post and Paul Krugman in the New York Times, a number of people on the political left began looking for some, shall we say, exotic solutions to avoid any restraints on their desired levels of spending and borrowing in association with the rapidly approaching collision with the debt ceiling. (As of this writing, the Treasury has already begun drawing down one of its own internal funds, the pension fund set aside for all Federal employees, to the tune of almost $200 billion to keep the ceiling from being breached until late February or early March.)
One of the most exotic was to mint a “trillion dollar coin” made of platinum. US law contains limits on how much currency can be minted from precious metals such as gold or silver, but only coin collectors had any interest in platinum coins, so the law contains no limits on how much platinum coinage the US Mint can, well, mint. So, the Left’s idea was to mint a trillion dollar coin, and deposit it with the Federal Reserve, which would then be able to issue notes (paper currency) supposedly backed by the platinum the government had “paid back”. Voila! Another trillion to spend without technically exceeding the debt limit.
The Federal Reserve looked at this and decided it wouldn’t be a good idea at all. But before the trillion dollar coin vanishes down the memory rabbit hole, it would be well to examine this incident for what it tells us about: 1) how big a spending problem the United States now has; 2) the extent we are in policy denial about our spending problem; and, 3) how that policy denial can quickly turn into a loss of confidence in the currency itself.
To start that examination, consider what such a coin would look like. Although during the coin idea’s brief fling, conversation focused on whose face should be on the coin, the conversation should have been about how big the coin would be. That, in turn, would depend on whether the coin was really backed by platinum, or whether it was really money merely by fiat.
Money is, of course, a deep concept with a lot of properties of its own (like velocity) that are important in modern economics. But for present purposes it is merely important to distinguish how much the “money” has to be transformed in order to result in the owner receiving desired goods or services.
Economies evolve out of bartering. Meat for spear points. Hides for plant food. Labor for a seat by the fire. Whatever.
As trading becomes more complicated, some trade items are more valuable than others simply because they can be used for more transactions in more settings more often. So you begin to keep trade goods with an eye to what you can get for them more than for their direct value to you. Certain luxury goods — like gold or jade or even cocoa beans — can be especially useful in this regard because consumers of luxury goods almost by definition have ready access to almost everything commoners could wish to trade.
But the powerful don’t actually have to keep “almost everything” on hand. Their promise to make the trade valid can induce third parties to give you what you want in exchange for the promise from the sovereign itself. In fact, the promise can be implicit if it’s conveyed in some good that the powerful person normally buys (like a precious metal). It can also be something as simple as a piece of paper with the promise authoritatively written on it, even if the paper is worthless as a good itself. So you go from bartering, to “money” as a medium of exchange, and then to fiat money, where it is the promise of the sovereign to make good, and to force others to make good, on the promise, that carries the value rather than the media in which the promise is embedded. In fact, most US money today exists in the form of electronic entries in a bank somewhere, and the sovereign US government exerts only indirect control on the extent of such promises being made in its name.
Once technology advances, of course, uses for things change, so the boundary between luxury good or medium of exchange or tool or necessity for daily life is constantly subject to redefinition. Further, the value of the promise itself is only as good as the power and trustworthiness of the sovereign. I don’t know about the trustworthiness of Jefferson Davis, but nobody today values the power to deliver on any promises backed by Confederate dollars.
So, there is a significant conceptual difference in the “real” (i.e., how much grain can I get for a bar of platinum bullion) value of money and the “fiat” value (i.e., how much grain can I get because some bank has been delegated a promise from the US government to make people give me grain for the dollars the bank says are in my account).
Normally the distinction doesn’t matter — until it does. Everyone was merrily exchanging dollars through bank accounts until sometime in 2008, when people suddenly realized that some banks were not fully backed by sovereigns that had any power to make people fulfill their promises to other banks and financial institutions, and that even the laws about the order of precedence with which those promises that could be kept would be kept were themselves being redefined retroactively. The Great Recession and the Ever-receding Recovery were underway.
To keep people from realizing that their promises might not be all they were advertised to be, sovereigns throughout history have had a tendency to fudge the accounting to allow themselves to keep spending a bit more for as long as possible. Rome jealously guarded its right to mint imperial currency of silver and gold which subject peoples were mostly glad to accept — until Roman territorial expansion stopped and significant gold and silver mines could no longer be incorporated into the Empire. Thereafter, the actual amount of gold and silver in any denomination of coin began to shrink.
Of course, it helped if, as the Romans did, you put the devalued coins into your economy by paying them directly to armed troops. They had more than a usual incentive and means to ensure that commoners accepted them in any transaction. Indeed, by the time the actual gold in the coins declined to half its amount, the price of bread had only tripled, so maybe inflation wasn’t that bad — if you had access to coins at all.
So, would a trillion dollar platinum coin rest on the value of the platinum? Or would it rest on the willingness of people to continue to trust in the promise of their own (and foreign) sovereigns. That is an easy question to answer.
As of January 10, the spot price of platinum bullion was quoted as $1626 per ounce, some $40-$50 dollars per ounce less than the price of gold. It may have fluctuated some this past week, but you’ll see in a moment that it doesn’t really change the conclusion:
At $1626 per ounce, it takes 6.15×10^8 ounces of platinum to produce a trillion dollar coin.
That’s 19,220 US tons of platinum, or slightly heavier than the ballistic missile submarine Nevada, shown here as it passes Seattle. The entire US gold stocks housed in Fort Knox are only on the order of 5000 tons.
Now, if only we’d built our missile submarines out of platinum, we could save the mint a lot of effort, while creating an entirely new metaphor for “beating your swords into plowshares”. Turning your platinum nuclear submarines into self-propelled coins, anyone?
In fact, we could play the same game with our entire national debt. That would only require a platinum coin weighing about 315,000 tons, or something the size of a “very large crude carrier” (VLCC). These are typically on the order of 1000 feet long.
Thus, let us dispense with the notion that platinum backing had anything do to with the value of the trillion dollar coin. The notion was simply another sovereign promise to keep previously made sovereign promises, and thus added nothing to the credibility of the previous promises. The idea was rejected by the Federal Reserve as people began to realize that it might instead draw attention to the weakness of the original promises. It graphically showed how much has been promised compared to any prospects for the economic growth rates necessary to fulfill those promises with actual goods and services. If your promise is any good, why do you need to promise to keep your promise? If your original promise was no good, why should I believe your new promise? If you can’t deliver on what you’ve already promised, why are you making more promises to other people?
And that is the real problem. Our economy, and, by extension, the economies of most nations of the world, now depend almost entirely on faith in sovereign governments that seems to be eroding on global scales across multiple societal models. Material inequality seems tolerable if those with less feel they have enough (or value non-material things more), or if they have sufficient hope of acquiring more in the future. But if the future, let alone the present, seems closed off, tolerance for inequality falls. People look for sources of security outside of the sovereign promises if they can. Or there is increased likelihood of conflict as people realize they could be the ones holding the unfulfilled promises upon which they have relied, and try to be sure that someone else is “voted off the island”.
One of the arguments made for the trillion dollar coin was that the US government has to keep the promises it has already made, and the clear intent was to put pressure on the Republicans in the 113th House of Representatives to raise the debt ceiling without enforcing any price in spending reforms. This is likely a winning argument politically, but it doesn’t keep the VLCC-sized debt from growing toward “ultra -large crude carrier” status. We will be needing another trillion dollar platinum coin in about 8 months. The last people (or their children) to figure that out and decouple their own economic welfare from the fantasy will be the ones left holding the empty promises, and sacrificing their future potential.
We should insist that the discussion stays focused on who made the promises, and insist that they take responsibility for spending reform. In this regard, it is imperative that we understand that a President, a Senate, and a House of Representatives must have agreed in passing laws that spend money — but it usually is not the current President, Senate, or House. As Stephen Marsh noted in an earlier Wheat and Tares post last summer:
“…63% or so of the budget, about 2/3rds, goes out the door without any voting at all by Congress. Social Security, Medicare, Medicaid, Food Stamps, Farm Subsidies — all on autopilot. That means that in 2009, every dollar of tax money had already been spent before Congress did anything. They needed debt for everything they wanted to spend. The tax revenue only covered the autopilot expenses.”
The real authorizations for that spending occurred as laws were written decades ago. While, in a sense, therefore, it is indeed true that “both parties” did it, using that to gloss over the responsibility of each party to reform that spending keeps us trapped in the fantasy. Indeed, if we look back over the past 50 years, to the passage of the Civil Rights Act and the beginning of Lyndon Johnson’s Great Society, we find the following about which party has been in control of the Legislative and Executive Branches of the US government how much of the time:
During that period, the Republican Party has simultaneously controlled the House, the Senate, and the Presidency only 12% of the time. The Democratic Party has simultaneously controlled the House, the Senate, and the Presidency 28% of the time. At least one of the three necessary institutions has been held by each party 60% of the time, meaning that both parties must favor entitlement reform for it to occur — to turn off the autopilots for programs — most of the time. If either party demonizes the other for trying to reform entitlements, spending will simply continue to spiral out of control.
Indeed, if it comes to “Congress paying for what it has authorized”, and leaving the President out of the debt ceiling negotiation, the Democratic Party has held both houses of Congress 60% of the time, so the Democratic Party still need only point at itself. (You didn’t think that it was all of these cold-hearted Republicans who want to throw Grandma off the cliff who passed all of the compassionate programs that we can’t pay for, did you?”) So, we keep getting dodges like trillion dollar coins, doomsday sequesters that will force a “super-committee” to walk off the cliff (until we ignore the sequester), debt commissions that will only report after the next election (and then be ignored), and annual budget deadlines that are flaunted for years on end for short-term political gains.
At least Marie Antoinette probably liked the taste of the cake. I understand platinum leaves a bad aftertaste.