http://www.bloomberg.com/markets/rates-bonds/government-bond... says that the current yield on 1-year US treasuries is 0.20%. If I understand correctly, that means that if you plow US$100 000 into 1-year US treasuries in the open market, you get treasuries redeemable (at the Treasury) a year from now for US$100 200. (Thanks for the correction to the number, aquark and perlgeek.)
In other words, the bond market says that the big banks are betting heavily against any kind of hyperinflationary move like this.
If the 'supercoin' is only held by the government, and only used to free up enough of its debt to itself to continue on the same fiscal path as a debt-ceiling-change would allow, then it won't be any more hyperinflationary than a debt-ceiling-change.
Now, if instead they gave the $5 trillion coin to Goldman Sachs... :)
I feel like this entire house of cards that is the international financial system is going to completely collapse in my lifetime. I'm not extremely familiar with the details, but the more I learn, the more fragile and arbitrary the whole thing seems.
I recently read a fiction book, "The Panic of '89" by Paul Erdman, which discusses a hypothetical terrorist plot to create an international run on US-priced financial instruments and institutions. Interesting hypotheticals abound.
It also mentions the Gramm-Rudman act, which I had not heard of prior to reading the book. It was an 'Emergency Deficit Reduction Act' from 1985.
The really interesting thing is it's probably the most stable house of cards ever built; generally speaking, it is in nobody's best interests for the international finance system to collapse.
Interestingly enough, there are conspiracy theories that say JFK did something similar to try to subvert the FED's total authority to "print money" by doing something similar to what is suggested in the article. The order gave the Treasury the power to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury.
Jack Balkin has been engaging in a sort of parlor game of making up other alternatives as well. The main issue is that issuing debt is just one way of acquiring/manufacturing cash; you can do it lots of other ways. A straightforward way is minting coins. But you can even do it ways that the private-sector can also do, like by selling options on government assets, or inventing and selling derivative securities.
For example, he has an only-half-tongue-in-cheek article about how to use some of the magic from the recent financial crisis to gain a bunch of cash on hand. Banks can in effect mint money by writing and selling derivative securities. Well, if the Treasury issues credit-default-swaps on its own debt, it collects a premium up front (the value of the CDS), and if it never defaults, it never has to make a payout. Even better, it could write a gigantic CDS for the entire debt, and deposit it with the Federal Reserve, which would credit the account for the value of the instrument, like they do with any member bank that deposits a financial instrument. Of course, that financial instrument was just recently manufactured from thin air before it was deposited, but that's true of any CDS.
The treasury selling CDS on its own debt makes no sense, because the credit-worthiness of your insurer is completely correlated to the underlying credit. So people would pay zero for the credit protection.
Quite why people away from the financial markets assume that those that are are going to fall for something so obvious is a mystery to me. And if you think that the housing crisis is a counterexample, I should point out that people over-leveraging themselves to invest in property at ever-increasing prices was common wisdom back in 2005.
It doesn't sound too much different than QE1 & QE2 -- where the Federal Reserve created a trillion dollars out of thin air and used it to buy US debt and mortgage securities.
I'm not a lawyer, but don't the courts usually sort out conflicting laws? It seems that's the case -- congress demanded the executive branch spend money -- and congress has now decided the executive branch can't spend money. Why doesn't Obama take it to the courts?
It's quite possible the courts would punt on this one due to separation-of-powers concerns. If Congress passes a law requiring the president to execute some laws, but also refuses to fund him sufficiently to do so, resolving the problem arguably is the responsibility of the executive branch.
The SC isn't known for being expeditious. Obama likes to believe congress will work together to solve these things, and it works most of the time. But now we're less than a week from needing a solution with no signs of progress.
Wouldn't this cause massive inflation almost instantly? We could have the next Zimbabwean Dollar (http://en.wikipedia.org/wiki/Zimbabwean_dollar). Isn't this extra just 'printing money' the type of thing that you learn in Econ 101 is about the worst possible thing for an economy? Sounds like the medicine will be worse than the disease?
Not necessarily, though $5 trillion all at once would probably not be a good idea. The money supply is a bit tricky in these days when most transactions (especially large ones) don't actually use cash. Issuing new debt in a sense already is like printing money, because bonds can be used as cash-like instruments in many situations. That's particularly true of U.S. Treasuries, because they're safe and liquid enough that they can be used as quasi-cash, especially for large transactions, e.g. settling part of a debt by transferring title to Treasuries. It's a bit of an open question to what extent just printing $500b would be different from issuing $500b in new bonds, and heavily interacts with the background situation (e.g. prevailing interest rates, demand for Treasuries, liquidity situation).
There are a decent number of economists who think that the U.S. a year or two ago should've fought deflation by just printing $500b or $1 trillion or something, rather than pursuing the quantitative easing (QE) scheme, which uses financial trickery to get some of the same effect without officially printing money. The just-print-money option may have actually worked better, been more transparent, and had the added bonus of reducing our national debt.
It can only cause inflation when the money actually hits the economy. The effect would be no different than raising the debt ceiling. Some special book keeping (which is what this whole mess is) will do nothing by itself.
We've already printed and spent quite a bit of money, and while it has produced increases in commodity prices it has not produced hyperinflation. Replacing debt-backed money with debt-free money, while leaving the amount of money more or less the same, would also not cause hyperinflation.
So, is America now a complete laughing stock abroad? I really wonder what non-USian folks think about all this political posturing and willingness to play chicken with the financial reputation of the US.
It's a major ongoing story in the newspapers here in Belgium (front page, all of p.3 today in mine). Don't worry, we and other countries in Europe that I am familiar with have our own face-palming political situations, though of course our countries are smaller. If anything it makes me feel we're all in the same boat together.
Most people don't, do the newspapers do mention it every couple of days.
Granted I am in Scandinavia so they are likely to be more biased but right now they are far, far more concerned with the terrorists reaction when he heard the number of people he murdered, who was buried first, etc, etc, etc.
[+] [-] kragen|14 years ago|reply
In other words, the bond market says that the big banks are betting heavily against any kind of hyperinflationary move like this.
[+] [-] aquark|14 years ago|reply
Still at that rate you'd figure the transaction costs of moving the money around would swamp most of the return
[+] [-] gojomo|14 years ago|reply
Now, if instead they gave the $5 trillion coin to Goldman Sachs... :)
[+] [-] perlgeek|14 years ago|reply
[+] [-] andrewljohnson|14 years ago|reply
http://krugman.blogs.nytimes.com/2011/07/29/lawyers-coins-an...
[+] [-] mvzink|14 years ago|reply
[+] [-] grannyg00se|14 years ago|reply
[+] [-] chopsueyar|14 years ago|reply
It also mentions the Gramm-Rudman act, which I had not heard of prior to reading the book. It was an 'Emergency Deficit Reduction Act' from 1985.
http://en.wikipedia.org/wiki/Gramm%E2%80%93Rudman%E2%80%93Ho...
[+] [-] sliverstorm|14 years ago|reply
[+] [-] sunsu|14 years ago|reply
See executive order 11110: http://en.wikipedia.org/wiki/Executive_Order_11110
[+] [-] _delirium|14 years ago|reply
For example, he has an only-half-tongue-in-cheek article about how to use some of the magic from the recent financial crisis to gain a bunch of cash on hand. Banks can in effect mint money by writing and selling derivative securities. Well, if the Treasury issues credit-default-swaps on its own debt, it collects a premium up front (the value of the CDS), and if it never defaults, it never has to make a payout. Even better, it could write a gigantic CDS for the entire debt, and deposit it with the Federal Reserve, which would credit the account for the value of the instrument, like they do with any member bank that deposits a financial instrument. Of course, that financial instrument was just recently manufactured from thin air before it was deposited, but that's true of any CDS.
http://balkin.blogspot.com/2011/07/end-debt-crisis-now-with-...
[+] [-] mdda|14 years ago|reply
Quite why people away from the financial markets assume that those that are are going to fall for something so obvious is a mystery to me. And if you think that the housing crisis is a counterexample, I should point out that people over-leveraging themselves to invest in property at ever-increasing prices was common wisdom back in 2005.
[+] [-] burgerbrain|14 years ago|reply
[+] [-] tibbon|14 years ago|reply
[+] [-] nostromo|14 years ago|reply
I'm not a lawyer, but don't the courts usually sort out conflicting laws? It seems that's the case -- congress demanded the executive branch spend money -- and congress has now decided the executive branch can't spend money. Why doesn't Obama take it to the courts?
[+] [-] _delirium|14 years ago|reply
[+] [-] mkr-hn|14 years ago|reply
[+] [-] tibbon|14 years ago|reply
[+] [-] _delirium|14 years ago|reply
There are a decent number of economists who think that the U.S. a year or two ago should've fought deflation by just printing $500b or $1 trillion or something, rather than pursuing the quantitative easing (QE) scheme, which uses financial trickery to get some of the same effect without officially printing money. The just-print-money option may have actually worked better, been more transparent, and had the added bonus of reducing our national debt.
[+] [-] sunsu|14 years ago|reply
[+] [-] anonymoushn|14 years ago|reply
[+] [-] mkr-hn|14 years ago|reply
[+] [-] unknown|14 years ago|reply
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[+] [-] callmeed|14 years ago|reply
[+] [-] aj700|14 years ago|reply
[+] [-] georgieporgie|14 years ago|reply
[+] [-] ugh|14 years ago|reply
[+] [-] dhs|14 years ago|reply
[+] [-] burgerbrain|14 years ago|reply
[+] [-] Luc|14 years ago|reply
[+] [-] tomjen3|14 years ago|reply
Granted I am in Scandinavia so they are likely to be more biased but right now they are far, far more concerned with the terrorists reaction when he heard the number of people he murdered, who was buried first, etc, etc, etc.
[+] [-] anonymoushn|14 years ago|reply
[+] [-] justincormack|14 years ago|reply