By Laurence Kotlikoff

No doubt, you’ve heard about the latest irresponsible fiscal/monetary proposal to be floated by members of Congress and the erstwhile economist, Paul Krugman, whose lunch was just eaten by Jon Stewart.

It entails having the Treasury avoid the federal debt limit by handing the Federal Reserve a single $1 trillion platinum coin. The Fed would then credit the Treasury’s bank account with $1 trillion, which the Fed could spend on the President’s lunch, a $200 toilet seat, a new aircraft carrier, more Medicare spending – anything it wants.

Pulling Money Out of Thin Air

Is there anything special about platinum? Well, yes. The coin doesn’t have to contain $1 trillion worth of platinum. It can be microscopic for all the Fed cares as long as they can use a electron microscope to read the $1 trillion "In God We Trust" inscription. But it has to be made out of platinum. No other metal or substance, like a piece of pizza, will do. The reason is that the Treasury has the right, by an obscure law, to mint platinum coins, but only platinum coins. Otherwise, making money by making money is the Fed’s domain.

Countries that pay for what they spend by printing money or, these days, creating it electronically, are usually broke. That certainly fits our bill.

Our country is completely, entirely, and thoroughly broke. In fact, we’re in worst fiscal shape than any developed country, including Greece. We have fantastically large expenditures coming due in the form of Social Security, Medicare, and Medicaid payments to the baby boom generations – I.O.U.s, which we’ve conveniently kept off the books.

When the boomers are fully retired, Uncle Sam will need to cough up $3 trillion (in today’s dollars) per year to pay us (I’m one of us) these benefits. To put $3 trillion in perspective, it’s 1.5 times Russia’s GDP.

These benefits are called entitlements because, presumably, we feel we are entitled to hit up our children to cover their costs. Borrowing from them and letting them tax themselves and their kids to pay themselves back is a good trick, but it’s running afoul of the debt ceiling. Taxing them more and promising to the pay them benefits they’ll never receive is an old trick that’s run its course. So we’re now onto printing money that will, we hope, raise prices only after we have protected our assets against inflation.

We've Been Here Before

And we’re printing lots and lots of money. Indeed, over the past five years, the Treasury has, in effect, done its $1 trillion coin trick twice.

Come again?

Well, substitute a $2 trillion piece of paper called a Treasury bond for the platinum coin. Suppose the Treasury prints up such a piece of paper and hands it to the Fed and the Fed puts $2 trillion into its account. No difference right, except for the lack of platinum.

Next suppose the Treasury doesn’t hand the $2 trillion bond to the Fed directly, but hands it to John Q. Public who gives the Treasury $2 trillion and then hands the bond to the Fed in exchange for $2 trillion. What’s the result? It’s the same. The Treasury has $2 trillion to spend. John Q. Public has his original $2 trillion. And the Fed is holding the piece of paper labeled U.S. Treasury bond.

Finally, suppose the Treasury does this operation in smaller steps and over five years, specifically between 2007 and today. It sells, i.e., hands to John Q. in exchange for money, smaller denomination bonds, which Johns Q. sells to the Fed, i.e., hands to the Fed in exchange for money. Further, suppose the sum total of all these bond sales to the public and Fed purchases of the bonds from the public equals $2 trillion. Voila, you’ve got U.S. monetary policy since 2007.

In 2007, the monetary base – the amount of money our government printed in its 231 years of existence totaled $800 billion. Today it totals $2.8 trillion. And it increased by this amount via the process just described – the Treasury’s effective minting out of thin air two $1 trillion platinum coins.

A Hidden Tax

Now what happens when the Treasury spends its freebee money? It raises prices of the goods and services we buy or keeps them from falling as much as would otherwise be the case. Either way, the money we have in our pockets or in the bank or coming to us over time as, for example, interest plus principal on bonds we’ve bought in the past – all this money loses purchasing power. So we are effectively taxed $2 trillion.

What the advocates of the $1 trillion coin are, therefore, proposing is to tax us in a hidden way. This is not just taxation without representation. It’s also taxation with misrepresentation. The fact that a Nobel Laureate in economics would propose this without making clear this fact raises the question of whether his prize should be revoked. Lance Armstrong, after all, is losing his medals for discrediting his profession. Perhaps the Nobel committee should consider taking back Krugman’s.

This is no innocent omission. Every PhD economist is taught about seigniorage. It’s a term that was coined (excuse the pun) in the 15th century and stems from the right of feudal lords – seignurs – to coin money, use it to buy, say, chickens and debase the purchasing power of the coins they had given their serfs in the past for, say, wild boar.

Today, 12 cents out of ever dollar being spent by our government is being printed. As indicated, the money supply has more than tripled. While inflation, let alone hyperinflation, has not yet occurred, everything is in place for this outcome. If you want to see what things will look like, check out Zimbabwe, which has surely been reading Krugman’s articles.

Laurence Kotlikoff is an economist at Boston University, co-author of The Clash of Generations, and President of Economic Security Planning, Inc.

By Peter Cooper

Think Zimbabwe a moment. This is the most recent example of a hyperinflationary depression. Basically in Zimbabwe the black nationalists ejected the white farmers and replaced them with locals who could not farm, crashed the economy and started printing money. Hey presto! Rampant hyperinflation and a very depressed economy.

The problem with printing money to solve economic problems is that once started it is very hard to stop. It is always easier to print more than deal with underlying issues such as over-spending and a government-dominated economy. Democratic politicians like turkeys do not usually vote for Thanksgiving.

Fed minutes

You could see the official concern mounting in the last minutes from the Federal Reserve’s main committee. The Fed is fully aware of the dangers of keeping interest rates too low for too long and printing money ad infinitum. But it only recently set a target of 6.5 per cent unemployment before it will rescind QE money printing, is that now in doubt?

Money printing is also highly contagious. It sets off competitive devaluation and invites the same policy action by other central banks who can justify their policy by reference to their peers. Besides so many countries also have the humungous debts that money printing is designed to cure by the supposedly painless process of robbing savers through inflation.

Take Japan. Its new government is copying the Fed with gusto, just as the Japanese once copied American automobiles until they overtook them. Actually the risk is very similar, namely that the Japanese version of QE succeeds in damaging the US economy, this time through a lower yen and cheaper Japanese imports.

Could the Fed take away the punch bowl of QE while the Bank of Japan is liberally welcoming guests? And Japan is hardly alone. The Bank of England QE program is reckoned to have been the largest per capita of any nation. The European Central Bank is committed to bond buying to support the national debts of the growing list of struggling eurozone members.

Odd man out?

Who is not printing money? We almost suggested the Gulf States but then all bar Kuwait have dollar-linked currencies so that is not true. You are left scratching around the global periphery and looking at countries like Norway and Sweden or perhaps Russia and sundry smaller Asian states.

But it is true that we have nothing like the Zimbabwe paradigm so far. Another earlier example was the Weimar Republic in the early 20s in Germany when war reparation debts were paid with paper. Could things get so far out of kilter this time?

You might be forgiven some skepticism. However, the Fed is taking a big risk in global bond markets. It cannot carry on buying its own paper forever. If the bond market crashes – and that will happen when inflation rises so high that all the remaining bond holders cash out – then how can the government finance itself except with the printing press?

Currency devaluation

Money in that case quickly loses its value. The dollar has lost half its value against a basket of gold and silver over the past five years, so this is already happening. It is not a question of whether it might happen, it already has already started.

Can this process accelerate to the point where money loses most of its value, the credit system crashes and business activity slumps? That unfortunately is the destination to which present central bank polices lead us.

Investors have few places to hide in such a scenario. Gold, silver and some real assets are the way to go. We might avoid the fate of Zimbabwe but get uncomfortably closer before things could be turned around in a great global currency reset, and in that case real assets will still the only place to be invested.

For a more detailed look at where to invest for the best returns in this economic climate our sister monthly investment newsletter has the top tips and is available now on special offer (subscribe here).

Low inflation figures

We know the instant rejoinder to the hyperinflation argument: show us the inflation. And it is true that headline inflation rates have stayed stubbornly low recently. However, these figures are manipulated to look lower than they really are and have been moving up sharply over the past year, whether you look at the US, UK or Japan.

The danger is that the central banks are being overly complacent about false figures while the trend is definitely up. Pump in more and more money, as all the central bank are doing and there is only one way for this inflation to go and that is up.

Crash the financial system and you end up with money printing to infinity and hyperinflation. Zimbabwe was once a low inflation economy.

http://news.goldseek.com/PeterCooper/1358173002.php

By Martin Crutsinger, AP Economics Writer

WASHINGTON (AP) -- Treasury Secretary Timothy Geithner says the government has begun borrowing from the federal employee pension fund to keep operating without surpassing its debt limit.

Geithner says in a letter to congressional leaders that the move will free up $156 billion in borrowing authority while Congress debates increasing the $16.4 trillion debt limit.

The government reached its borrowing limit on Dec. 31, but began using bookkeeping maneuvers to keep from surpassing it. Geithner has told congressional leaders that Treasury expects to exhaust those measures by mid-February to early March.

The latest action has been taken by other Treasury secretaries and will not put in jeopardy any monthly pension payments. Geithner said he will replace the funds removed from the pension account after the borrowing limit is raised.