A proposal that has been making the rounds again is that the United States can somehow solve its debt problem by issuing trillion-dollar coins struck in platinum and use them to pay down the debt. While the proposal sounds marginally plausible if said quickly enough while moving walnut shells or thimbles around on a tabletop with a pea hidden in the crook of the presenter’s little finger — where we get the term “thimblerig” for a con man or other variety of sleight-of-hand artist — it falls apart of its own dead weight once the proposal is examined in the light of common sense and a little elementary bookkeeping.
First, let’s look at the problem: the United States has $32 trillion in government debt outstanding, give or take. This is what we in the accounting biz. call a “liability.” That means it’s money the government owes to other people. When the bill comes due (i.e., when the debt “matures”), the government must give the holder of the debt money.
Now, if the money the government gives the debt holder is money the government collected in taxes, well and good. The debt holder presents, say, $5 trillion in government debt for payment, receives $5 trillion from the government, and total government debt outstanding decreases by $5 trillion.
Suppose, however, that the government doesn’t have the money, and needs to pay $5 trillion in debt presented for payment anyway. In that case, the government looks over its shoulder, issues $5 trillion in new debt, a liability of the government, which it sells to the Federal Reserve. The Federal Reserve accepts the government debt (a liability of the government, but an asset of the Federal Reserve) and creates $5 trillion in new money (a liability of the Federal Reserve, but an asset of the government).
Net effect in aggregate? Zero all around. If the government uses the new money to retire the old debt, it decreases the old debt by $5 trillion and increases the new debt by $5 trillion.
Suppose, however, that no debt is being presented for payment, but the government wants to spend $5 trillion and isn’t collecting the taxes to do so. In that case, it issues new debt and sells it to the Federal Reserve, and the Federal Reserve creates $5 trillion, backing it with the government debt. Government debt increases by $5 trillion.
Now, what some people have been proposing is this: that instead of replacing old debt with new debt as it comes due, or to be able to increase government spending without having to collect taxes or increase government debt, the government should issue $1 trillion platinum coins. The cost of the platinum compared to the face value of the coins would be for all practical purposes zero. This would mean that for every $1 trillion coin minted, the government would make $1 trillion in profit!! Huzzah!!!!! All government debt would disappear in seconds!!!!!!!
Bull. Whoever thought up this brilliant idea had no notion of basic bookkeeping or principles of accounting.
|Hank 8, inflation for fun & profit|
This is because the difference between the face value of a coin and what it costs to make the coin — called “agio” or “seigniorage” — is not a profit to the issuer but a liability of the issuer. It goes on the books of the issuer under “liabilities,” not “retained earnings.” Same side of the balance sheet, but not the same owner. The issuer of a coin does not own seigniorage, he owes seigniorage. When an issuer of money treats seigniorage as a profit to be spent, he “inflates the currency,” i.e., steals from anybody dumb enough to accept his coins. That’s why inflation is called a “hidden tax”: it’s not as obvious as paying money to the government, it’s the government transferring your purchasing power to itself by making your money worth less than before by issuing money backed by its own debt.
Now consider this. If the government were to issue $1 trillion coins in payment of the debt, what would the person who accepted the coin in payment do with it? Hold it for a while until returning it to the government and demanding $1 trillion? We’d be right back where we started. The government would have to come up with $1 trillion. Where would it get it? Tax collections, issuing new debt, or striking a new $1 trillion coin? If the last, what would be the point? The holder of the coin in the first place doesn’t want to get the same thing in return. He wants to cash it in. He wants the folding stuff, and the only rational way to do that is to collect the money in taxes to redeem the $1 trillion coin.
In short, if the government were to issue a $1 trillion platinum, gold, silver, copper, cardboard coin or anything else, it would only be the same old kind of debt in a different form. Frankly, the only realistic way to get out of debt is to figure out a way to repay it, not to repudiate it, that is, declare de facto bankruptcy. That being the case, the only way out that we know of is to pass the Economic Democracy Act at the earliest possible date.