On Jan. 8, Nobel Prize-winning economist and Princeton University economics professor Paul Krugman published his official endorsement on the New York Times website of the proposal for the Treasury to mint a $1 trillion platinum coin if congressional leaders cannot agree to raise the nation’s debt ceiling.
The concept of the U.S. Treasury issuing a $1 trillion platinum coin, suggested by Rep. Jerrold Nadler of New York, would exploit a loophole in a federal law which only specifies the amount and denominations of paper, copper, gold, and silver currency the U.S. Mint can issue.
The statute contains no specifics regarding platinum, so Nadler and others have urged President Barack Obama to order the minting of one or more trillion dollar coins to be placed on deposit at the Federal Reserve in return for funds to continue spending without raising the national debt ceiling.
Paul Krugman, the professor who is the most influential liberal in the U.S. media according to Forbes magazine, is now endorsing the idea outright on his New York Times blog. Krugman cites his logic behind executing the trillion dollar coin minting proposal as a means of circumventing congressional approval for raising the debt ceiling by writing:
“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.”
It is clear from this statement that Krugman lacks a fundamental understanding of the basic structure and operations of the Federal Reserve System and financial intermediation.
The Fed is not a government agency, as Krugman states, because it is essentially a banking cartel controlled by 12 regional Federal Reserve Bank presidents and only seven political appointees.
The American Monetary Institute analyzes the Fed in the following way: “we conclude that although there are some elements of ambiguity, the Federal Reserve system is essentially dominated and controlled by private financiers, not our government; and to the extent that there is ownership of it, it is entirely private. Therefore despite the ambiguity – and confusion – the Fed is more accurately seen as a private, not a governmental institution, though with substantial governmental ties.”
In this way, the Federal Reserve and its banking system are not much different than many organizations in America. For example: the defense industry, automobile manufacturers, pharmaceutical companies, and public utilities would all qualify as having substantial governmental ties.
The salient point is that the Fed is not a government agency as Krugman states. It is a government-sponsored cartel that sets targeted rates for the prices of money, in addition to being a self-regulator of the banking industry. It has more in common with a public utility commission than a federal agency like NASA.
To think that the Federal Reserve, which is primarily concerned with matters regarding financial intermediaries and money markets, would willingly enter the numismatic coin market by placing one or more $1 trillion coins on its balance sheet is so preposterous that no serious banker would ever take the concept seriously.
It is true that the Fed does own $21 billion worth of gold bullion at the New York Fed, according to a report in the L.A. Times. A numismatic platinum coin with a $1 trillion denomination would have a declared value worth nearly fifty times that amount.
Clearly, there is nothing compelling the Fed to purchase a coin with such an obviously distorted value.
Krugman says the Fed could simply shrink the rest of its balance sheet by selling part of its portfolio of government securities, yet does not explain who the willing buyers of trillions of dollars in bonds would be. He then clarifies that this wouldn’t be necessary, by writing:
”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.”
However, if Krugman were correct, and the Fed did place a trillion dollar platinum coin on reserve and provide the Treasury with funds equivalent to face value, there is nothing stopping the federal government from more effectively pursuing this policy to its fullest potential in any of the following ways:
Double or triple federal spending: By minting and placing seven – or even ten – trillion dollar coins on reserve at the Fed, the U.S. could expand federal spending to $7 trillion or $10 trillion a year. Krugman himself complained that the 2009 Stimulus Bill was too small at nearly $800 billion. Presumably a multi-trillion dollar stimulus would lift the U.S. economy out of recession in Krugman’s analysis.
Introduce tax holiday: With six of these trillion dollar coins, the U.S. could pay for an entire year of current spending without collecting any federal revenues. That means the IRS could shutdown for a year, all national parks could be free, and no gasoline taxes.
Reduce the national debt to zero: Roughly 17 of the trillion dollar coins could repurchase the entire outstanding amount of U.S. Treasury securities at par value. The Treasury could then resume running $1.5 trillion deficits at near-zero rates until the debt ceiling is reached again.
Mint a $100 trillion (unenriched) uranium coin: The Dr. Evil option, to simply remind the world that U.S. financial hegemony ultimately derives its power from an unequaled military ability to potentially end the world at any moment. A financial collapse from a U.S. debt crisis seems small by comparison. Uranium coins actually do have a history and the word “dollar” derives from pursuit of silver coinage when uranium was discovered.
“We have a situation in which a terrorist may be about to walk into a crowded room and threaten to blow up a bomb he’s holding. It turns out, however, that the Secret Service has figured out a way to disarm this maniac — a way that for some reason will require that the Secretary of the Treasury briefly wear a clown suit. (My fictional plotting skills have let me down, but there has to be some way to work this in). And the response of the nervous Nellies is, ‘My god, we can’t dress the secretary up as a clown!’ Even when it will make him a hero who saves the day?”
As this Examiner previously analyzed, Krugman’s vile demagoguery of Republicans as “terrorists” is shockingly similar to the opening lines of “The Sixteen Points.”
As for the Treasury Secretary wearing a clown suit, Krugman already addressed that on Jan. 6 by taking himself out of the running to succeed Timothy Geithner.
For more analysis of Paul Krugman please read:
Steven Holmes is the Los Angeles Political Buzz Examiner.