Twitter tells me that I’m behind on this platinum coin thing:
Personally, I would like to know whether the economists seemed appalled by the idea of the platinum coin or the idea of blogging. Anyway, in case you’re been in a cave for the last couple of weeks, there is apparently legislation on the books that, on a technicality, would allow President Obama to fulfill the government’s debt obligations without needing to get congressional approval to raise the debt ceiling. The debt ceiling arguments are pretty absurd in the first place, since a vote to raise the debt ceiling is just a vote to actually pay out the money that you voted to spend at an earlier point in time. (It’s like voting to pay an AmEx bill or something.) So the bypass should be a nice, reasonable thing, right? Well the joke’s on you (and the government, apparently), since the proposed bypass involves the minting of a trillion-dollar platinum coin. (If you don’t believe me, you can read an excellent summary here, or you can read it straight from the likes of Paul Krugman here. And I’m pretty sure that this time, unlike with his theory of interstellar trade, he is in fact serious.)
At first, much of the debate was around whether this trillion-dollar coin thing was a good idea from either a political or economic perspective, but soon the logistical debate over this coin got way more interesting. It started off with a conversation I had with a friend that went like this:
Friend: So, dumb question. How can the gov’t produce a coin and just say it’s worth $1 trillion?
Me: Well, how can the gov’t produce a piece of paper and say it’s worth a dollar?
I was a bit taken aback by the fact that my friend seemed to have momentarily forgotten how money works. After all, I thought that we had cleared up this issue around the time that we were told that zinc prices were such that is costs well over a penny to make a penny. Unfortunately, my friend is not alone:
Or perhaps you would prefer the economic (and historical) wisdom of the National Republican Congressional Committee:
(HT to Steve Benen) Yeah, sooo…*facepalm* is really the only reaction I have to all of this. First, I’m pretty sure that the Titanic is already sunk, so technically any amount of platinum would sink it. Second, did we go back to a system of commodity money and everyone forgot to tell me? If not, here’s a handy reminder:
Commodity money is money that would have value even if it were not being used as money. (This is usually referred to as having intrinsic value.) Many people cite gold as an example of commodity money, since they assert that gold has intrinsic value aside from its monetary properties. While this is true to some degree- gold does in fact have a number of uses, it’s worth noting that the most often-cited uses of gold are for making money and jewelry rather than for making non-ornamental items.
Commodity-backed money is a slight variation on commodity money. While commodity money uses the commodity itself as currency directly, commodity-backed money is money that can be exchanged on demand for a specific commodity. The gold standard is a good example of the use of commodity-backed money- under the gold standard, people were not literally carrying around gold as cash and trading gold directly for goods and services, but the system worked such that currency holders could trade in their currency for a specified amount of gold.
Fiat money is money that has no intrinsic value but that has value as money because a government decreed that it has value for that purpose. While somewhat unintuitive, a monetary system using fiat money is certainly feasible and is, in fact, used by most countries today. Fiat money is possible because the three functions of money- a medium of exchange, a unit of account, an a store of value- are fulfilled as long as all people in a society acknowledge that the fiat money is a valid form of currency.
I guess my answer to my friend should have been “it’s worth a trillion dollars because the government will exchange it for a trillion of those dollar-looking thingies.” Technically the fiat currency creation being tossed around can only be legally implemented with a platinum coin, which is why platinum is the metal of the moment.
And hence my teachable moment- instructors, this is a prime opportunity to teach your kids about how money works and the concept of seigniorage. Seigniorage, simply put, is the revenue that a government generates from minting currency, and it’s equal to the value of the currency produced minus the cost to produce it. (In the world of the two giant platinum coins above, seigniorage would, by definition, always be negative.) It’s also a great opportunity to get people to think about the logistical challenges of using commodity or commodity-backed money…after all, it’s not impossible to increase the money supply (and cause inflation) when using commodity money, it just takes a lot more digging.
Update: Apparently there’s no shortage of humor (unintentional or otherwise) on this topic. Some highlights:
Via Brad Plumer:
And finally MSNBC’s tweet of the day (or morning, or something), from @pourmecoffee: