Over the last two weeks, we’ve looked at real consequences of the government’s fiscal rigor mortis. We’ve also explored Modern Monetary Theory’s argument that the result of deficit spending is a public good—reduced unemployment and increased GDP growth.
This week, I’d like to give you a penny—no, a $1Trillion coin(!)—for your thoughts.
Many people breathed a collective sigh of relief that the United States did not go over the so-called “fiscal cliff” on January 1. One proposed solution was rather odd. My reflections on this outrageous proposal will take you through another liminal dimension about the nature of money and the anvil of debt…
The proposal? The Treasury could mint a $1T coin, deposit it in the Federal Reserve Bank, and instantly create cash that could be spent, bypassing the debt ceiling.
A bill passed 12 years ago empowers the Treasury to mint a commemorative coin of any value. Thus, the possibility of such coin.
This outrageous proposal has taken me through a liminal dimension about the nature of fiat currency and money. Let’s retrace the steps together to see where many of us still live in both our perception and our reality:
We believe in the illusion of a gold standard world partially anchored in our college Macro Econ 101 course.
When some of us studied economics, we actually lived in a pre-1971, Bretton Woods world. While WWII was drawing to a close, representatives of 44 Allied nations gathered at Bretton Woods, N.H. to establish an international agreement: the value of those countries’ currencies was tied to the price of gold. During the post-WWII reconstruction of Europe and Japan, the U.S. dollar quickly supplanted gold as the de facto world currency.
By the late 1960s the U.S. struggled with high unemployment and high inflation and faced imminent pressure from other national banks seeking to redeem their dollars for gold. In order to prevent a run on U.S. gold reserves, President Nixon issued Executive Order 11615 on Aug. 15, 1971. This order decoupled the dollar from the gold standard and stemmed any further redemption of U.S. dollars for gold. By 1973, the world had largely moved to floating exchange rates.
Our monetary worldview is not in step with this reality! This perspective shows up in the rising price of gold (and some other commodities) as a “fear” signal and as hedge against last resort.
We can identify fear in the $1T coin as the proposed workaround to the budget ceiling. The “gold standard” mindset showed up in the rebuttals that the U.S. did not have enough platinum to mint a coin, unaware that for centuries, governments have utilized seignorage to create value: silver coins were only 90% silver.
Passing though this liminal dimension of seigniorage, I realized that we live in a world of agreements increasingly detached from physical realities. Is the anvil actually hollow as the post-Bretton Woods floating currency world suggests? Or is the anvil more like a black hole that will not only sink into the ground but also take blacksmith, hammer, and all with it? Stay tuned for a look at why Modern Monetary Theory would agree that the anvil actually IS hollow!
Share your thoughts on:
- The $1T coin.
- In what ways do you think, act and advise clients as though we are still on the Gold Standard?
- How might your advice change, knowing that we live in a virtual world?