US Gov may mint a 1 Trillion dollar coin out of thin air - Hiperinflation?

[Tacticat]

This recently hit the news. And while I'm no US citizen I'm very interested in this story as it may affect the euro as well and the overall credibility of fiat money itself.

In order to raise the debt ceiling and avoid passing through congress, US president Barack Obama may aprove the mintage of a new 1.000.000.000.000 coin (1 trillion). The coin would be backed by fiat money and it would be basically the same than printing 1 trillion new dollar bills.

Here's the full story with a friendly FAQ on Gaweker... although with a positive spin I don't agree with:
http://gawker.com/5973717/your-guide-to-the-trillion+dollar-platinum-coin-that-obama-can-mint-to-save-the-world

What do you think?
What would the effects be on the dollar? And on the euro?

[Luno]

The world would loose confidence in the Dollar. Even non economics interested Americans would consider this cheating.

It won't decrease US debt as the debt is to be paied in foreign currencies I presume.

So he won't do it. This is just stupidity.

[Kluge]

Would it be bad for the economy? Wouldn't it cause inflation?

No: the trillion-dollar coin won't increase the money supply any more than raising the debt ceiling would.

Um.......

[Tacticat]

Would it be bad for the economy? Wouldn't it cause inflation?

No: the trillion-dollar coin won't increase the money supply any more than raising the debt ceiling would.

Um.......

I laughed. The article contradicts itself right here:

How does it work?

Well, like any other coin, basically? The Treasury prints it and deposits it in the Federal Reserve, and then, boom: the U.S. government has a bank account with a trillion dollars with which it can pay its bills. For a more technical explanation, involving the word "seigniorage," here's the Corrente post from last year that first proposed the idea.

[cbeast]

The world would loose confidence in the Dollar. Even non economics interested Americans would consider this cheating.

It won't decrease US debt as the debt is to be paied in foreign currencies I presume.

So he won't do it. This is just stupidity.

I hope he mints 16 of these coins to pay back the Treasury notes. This would be a boss move like Andrew Jackson. We could then re-issue new money and restart American manufacturing without needing our lame Congress to pass protectionist laws. They can continue sitting on their arses.

[DeathAndTaxes]

Um guys the fed has "printed" ~$2T out of thin air in the last five years (Fed's balance sheet increased from ~$800B to $2.9T).  If we include the Fed's off balance sheet (magical money they print out of nowhere and lend to foreign central banks so for some reason it doesn't count on the "official" books) it is closer to a ~$4T expansion.

This is the part where D&T fails reading comprehension. 

Now the stupid ~$1T coin will never be made but not for the reason the Senator thinks.   The FED isn't in the business of giving away money.  The FED LOANS money.  If the FED produced a ~$1T coin and loaned it to the treasury it would be no different than the Fed buying $1T in govt bonds.   Either way it is a loan = debt = included in the debt ceiling.   Hell if the FED just wanted to give away money well they could simply buy some government debt and "vanish it".  Tada govt has $1T, $2T, $10T, $15T less debt.  It's magic.  No need for stupid coins to do that.

[cbeast]

Um guys the fed has "printed" ~$2T out of thin air in the last five years (Fed's balance sheet increased from ~$800B to $2.9T).  If we include the Fed's off balance sheet (magical money they print out of nowhere and lend to foreign central banks so for some reason it doesn't count on the "official" books) it is closer to a ~$4T expansion.

Now the stupid ~$1T coin will never be made but not for the reason the Senator thinks.   The FED isn't in the business of giving away money.  The FED LOANS money.  If the FED produced a ~$1T coin and loaned it to the treasury it would be no different than the Fed buying $1T in govt bonds.   Either way it is a loan = debt = included in the debt ceiling.   Hell if the FED just wanted to give away money well they could simply buy some government debt and "vanish it".  Tada govt has $1T, $2T, $10T, $15T less debt.  It's magic.  No need for stupid coins to do that.

Where did you get that the FED would mint the coin?

[cedivad]

Um guys the fed has "printed" ~$2T out of thin air in the last five years (Fed's balance sheet increased from ~$800B to $2.9T).  If we include the Fed's off balance sheet (magical money they print out of nowhere and lend to foreign central banks so for some reason it doesn't count on the "official" books) it is closer to a ~$4T expansion.

The USD monetary base went from less than 1T$ to 3T$ or I misunderstood what you wrote? Why the prices didn't bumped 3 times?

[caveden]

hahaha, Krugman makes fun of himself alone, we don't need to say anything. I don't know which is worse, this or the alien invasion to boost the economy thing.
The sad part is seeing people still taking this moron seriously.

Hell if the FED just wanted to give away money well they could simply buy some government debt and "vanish it". 

As a matter of fact, that's kind of how it works out:  https://mises.org/daily/4029

... after the Fed pays its employees, pays its electric bill, and throws the staff Christmas party, it remits the excess earnings back to the Treasury

[caveden]

The USD monetary base went from less than 1T$ to 3T$ or I misunderstood what you wrote? Why the prices didn't bumped 3 times?

Yes, and for the second question: http://research.stlouisfed.org/fred2/series/EXCRESNS

Mostly because banks are holding most of the extra money as excess reserves. Also, prices are not such a direct/immediate linear function of money supply, although they're strongly related.

[DeathAndTaxes]

Um guys the fed has "printed" ~$2T out of thin air in the last five years (Fed's balance sheet increased from ~$800B to $2.9T).  If we include the Fed's off balance sheet (magical money they print out of nowhere and lend to foreign central banks so for some reason it doesn't count on the "official" books) it is closer to a ~$4T expansion.

The USD monetary base went from less than 1T$ to 3T$ or I misunderstood what you wrote? Why the prices didn't bumped 3 times?

Because at the same time velocity fall off a cliff.  Monetary velocity is (simple version) how many times a single unit of currency is exchanged annually.  So if customer pays your employer $100, and your employer pays you $100, and you pay the grocery store $100 and the grocery store pays a farmer $100 even though it is the same "$100" you have a velocity of 4.  The effective money supply is roughly 4x higher.  So while the FED is rapidly expanding the monetary base the velocity is also falling.  Kinda like trying to fill the bathtub with the drain open.

As someone above pointed out the FED isn't actually putting money into the hands of the people.  It is putting money in the hands of the banks, who in theory should lend it out and increase the effective money supply however due to the FED other actions it is very profitable for the banks to simply borrow money from the FED use it to buy govt debt and mortgage backed securities.  Kinda hard to not make money if you can borrow a (nearly) unlimited amount at ~0% and collect interest at 2% to 4%.    Ironically simply having a free "lottery" where the winner gets $x dollars on a VISA gift card which must be spent within 365 days would be far more effective then handing ever increasing quantities of money to the banks to do "nothing" with it.


So money supply has exploded but no price inflation because the money is being circulated less.  However if the economy did finally pick up and velocity jumped to normal rates before the FED could soak up that excess money supply you would see massive inflation.  Probably not hyperinflation but price inflation in the high teens like the early 80s are certainly possible.



To use an analogy imagine if people are cold so the FED solution is to soak them with gasoline.  They still aren't warm so the  FED keeps dumping more and more and more gasoline.  Weeks, months go by and nope people aren't warm yet so the gasoline soaking continues, entire neighborhoods soaked with gasoline, businesses soaked with gasoline.  Tanker trucks of gasoline are brought in and 24/7 spraying of gasoline everywhere continues.   When the people complain "hey we are still cold", Ben Bernake's answer is "eventually there will be a spark and everyone will be warm".

[DeathAndTaxes]

Um guys the fed has "printed" ~$2T out of thin air in the last five years (Fed's balance sheet increased from ~$800B to $2.9T).  If we include the Fed's off balance sheet (magical money they print out of nowhere and lend to foreign central banks so for some reason it doesn't count on the "official" books) it is closer to a ~$4T expansion.

Now the stupid ~$1T coin will never be made but not for the reason the Senator thinks.   The FED isn't in the business of giving away money.  The FED LOANS money.  If the FED produced a ~$1T coin and loaned it to the treasury it would be no different than the Fed buying $1T in govt bonds.   Either way it is a loan = debt = included in the debt ceiling.   Hell if the FED just wanted to give away money well they could simply buy some government debt and "vanish it".  Tada govt has $1T, $2T, $10T, $15T less debt.  It's magic.  No need for stupid coins to do that.

Where did you get that the FED would mint the coin?

DOH.  Too early and not enough coffee.  The first part is still applicable though.

[deeplink]

To use an analogy imagine if people are cold so the FED solution is to soak them with gasoline.  They still aren't warm so the  FED keeps dumping more and more and more gasoline.  Weeks, months go by and nope people aren't warm yet so the gasoline soaking continues, entire neighborhoods soaked with gasoline, businesses soaked with gasoline.  Tanker trucks of gasoline are brought in and 24/7 spraying of gasoline everywhere continues.   When the people complain "hey we are still cold", Ben Bernake's answer is "eventually there will be a spark and everyone will be warm".

 

Your analogy would amuse me if it weren't so true.

[nevafuse]

Would it be bad for the economy? Wouldn't it cause inflation?

No: the trillion-dollar coin won't increase the money supply any more than raising the debt ceiling would.

Um.......

Based on M2, dumping $1T into the money supply would make every dollar worth ~10% less?  And the author just said it wouldn't cause inflation?  1% may be small enough to argue it's negligible, but 10% is a pretty hefty tax increase especially considering it mostly affects the poor/middle class since a majority of their wealth is in cash instead of stocks/real estate.

[Liquid]

So can we steal the coin lol 

[allthingsluxury]

Hah wow! now try making change for that!

[matthewh3]

Um guys the fed has "printed" ~$2T out of thin air in the last five years (Fed's balance sheet increased from ~$800B to $2.9T).  If we include the Fed's off balance sheet (magical money they print out of nowhere and lend to foreign central banks so for some reason it doesn't count on the "official" books) it is closer to a ~$4T expansion.

The USD monetary base went from less than 1T$ to 3T$ or I misunderstood what you wrote? Why the prices didn't bumped 3 times?

Because at the same time velocity fall off a cliff.  Monetary velocity is (simple version) how many times a single unit of currency is exchanged annually.  So if customer pays your employer $100, and your employer pays you $100, and you pay the grocery store $100 and the grocery store pays a farmer $100 even though it is the same "$100" you have a velocity of 4.  The effective money supply is roughly 4x higher.  So while the FED is rapidly expanding the monetary base the velocity is also falling.  Kinda like trying to fill the bathtub with the drain open.

As someone above pointed out the FED isn't actually putting money into the hands of the people.  It is putting money in the hands of the banks, who in theory should lend it out and increase the effective money supply however due to the FED other actions it is very profitable for the banks to simply borrow money from the FED use it to buy govt debt and mortgage backed securities.  Kinda hard to not make money if you can borrow a (nearly) unlimited amount at ~0% and collect interest at 2% to 4%.    Ironically simply having a free "lottery" where the winner gets $x dollars on a VISA gift card which must be spent within 365 days would be far more effective then handing ever increasing quantities of money to the banks to do "nothing" with it.


So money supply has exploded but no price inflation because the money is being circulated less.  However if the economy did finally pick up and velocity jumped to normal rates before the FED could soak up that excess money supply you would see massive inflation.  Probably not hyperinflation but price inflation in the high teens like the early 80s are certainly possible.



To use an analogy imagine if people are cold so the FED solution is to soak them with gasoline.  They still aren't warm so the  FED keeps dumping more and more and more gasoline.  Weeks, months go by and nope people aren't warm yet so the gasoline soaking continues, entire neighborhoods soaked with gasoline, businesses soaked with gasoline.  Tanker trucks of gasoline are brought in and 24/7 spraying of gasoline everywhere continues.   When the people complain "hey we are still cold", Ben Bernake's answer is "eventually there will be a spark and everyone will be warm".

I agree, instead of all these bank bailouts if they just gave people the money most would get spent.  Giving it to the banks yeah they just sit on it and buy government bonds.

[DoomDumas]

Nothing new here, it's the same as the trillions that have been printed in the last 5 years.. QE stuff with a disguise.. They changed the "Pr" for a "M"  Printing / Minting

And about hyperinflation, since 2010 I'm sad for those pilling cash for their old days, if those old days are in 10 years or more, they will regret.  

This campbell soup can price chart shows only a part of the effect of printing x trillion more dollars in the last 5 years...

IMO, the inflation caused by the printing of so much cash has just start to kick in !  

Watch out for a can of soup priced at 2+$ within few/several years.. No 401k plan can beat this, if there still money in those 401k (I think they replaced the money by an IOU note few years ago).



https://bitcointalk.org/index.php?topic=112269.0;all

[DoomDumas]

To use an analogy imagine if people are cold so the FED solution is to soak them with gasoline.  They still aren't warm so the  FED keeps dumping more and more and more gasoline.  Weeks, months go by and nope people aren't warm yet so the gasoline soaking continues, entire neighborhoods soaked with gasoline, businesses soaked with gasoline.  Tanker trucks of gasoline are brought in and 24/7 spraying of gasoline everywhere continues.   When the people complain "hey we are still cold", Ben Bernake's answer is "eventually there will be a spark and everyone will be warm".

+1

That's very true, quite a good analogy

Sad but soooo true !

[kgo]

The debt ceiling will be raised, and we will create a bunch of bonds that the Fed will pay for by creating money out of thin air.  The only difference in practice between the trillion dollar coin and raising the debt ceiling is that with the coin the government gets the money interest free.