Ben Bernanke appeared at the University Of Michigan Ford School Of Public Policy yesterday and he spoke at length about the current economic situation in the US. His most noteworthy comments were about the failure of Congress to raise the debt limit and whether seigniorage would be a feasible policy solution for the government to fund itself. (Seigniorage is an operation for funding government spending by issuing currency.)
The platinum coin issue was raised during the Question and Answer portion of the presentation.
And the first audience question is that, if Treasury had [inaudible] trillion dollar platinum coin [laughter], would the Fed have accepted it and credited Treasury's accounts? If not, why not and what does this mean for the independence of the Fed moving forward?Bernanke also spoke about the debt ceiling, in general.
Well, as you--I'm not going to give that any oxygen. [Laughter] As you probably know, the Treasury and the Federal Reserve over the weekend, the Treasury issued a statement which the Federal Reserve approved stating that we didn't think this was the right way to deal with this problem. I mean, there are legal issues or policy issues. I think the right way to deal with this problem, as I said earlier, is for Congress to do what it's supposed to do and needs to do and authorize an increase the debt ceiling so that we can pay our debts, we can pay our bills. And that's the right way to do it. And, you know, I think that's what will eventually happen. But I don't think that going off in that other direction would really be all that helpful.
[excerpted from a transcript]
[in the video embedded below, the quote begins at 45:15]
I want to say one word about the debt ceiling which is that not everybody understands what the debt ceiling is about. Raising the debt ceiling, which Congress has to do periodically, gives the government the ability to pay its existing bills. It doesn't create new deficits. It doesn't create new spending. So not raising the debt ceiling is sort of like a family trying to improve its credit rating saying, I know how we can save money, we won’t pay our credit card bills. That’s not the most effective way to improve your credit rating. And it was the very slow solution to the debt ceiling in August 2011 that got the US downgraded last time.
[in the video embedded below, the quote begins at 11:55]
It’s not a surprise that Bernanke doesn't accept seigniorage as a possible policy solution for funding the government. There’s a school of thought based on the intrinsic zero value of modern money and Bernanke doesn't adhere to it.
The idea that our money is created ‘ex nihilo’ (out of nothing) traces back to 1971, when President Nixon ended the gold standard. The dollar, no longer backed by gold, became ‘fiat money.’ Its value is no longer derived from gold because the finite quantity available limited the number of dollars that could be issued. Nobody wanted that. When the dollar was freed from its link to gold, dollar quantities could become infinite. Ok, I'm exaggerating, but you get the picture.
Without the value of gold to give the dollar its worth, what value does it have? Exnihiloistas say it only has a contrived value. It has the value arbitrarily assigned to it by its issuer, the US Treasury, and reinforced by the social contract and laws, and demonstrated everyday all the time in its acceptance throughout the land. Some exnihiloistas add or subtract minor points but the core of exnihiloism is the imaginary value of modern money.
What exnihiloistas are saying isn't wrong. What exnihiloistas are saying isn't untrue. It's a difficult concept to grasp and it's certainly beyond the understanding of people who believe that “In God We Trust” is what really matters.
Back to Bernanke. He’d probably object to the idea that there’s nothing to back the dollar and give it value because the dollar is always backed by another dollar. It may sound like doubletalk. What good is there in a worthless dollar backing another worthless dollar?
Think of a drop of water compared to the oceans. Or a single person compared to an army. The dollar’s value derives from every other dollar. Its value is collective and it also derives from the context in which it exists.
Labor, its ability to earn income, and what it produces give the dollar value. The consumer classes and the demand economy they create give the dollar its value. The worker who pays a tax gives the dollar its value. Business too gives the dollar its value. The sovereign State that issues and manages its currency gives the dollar its value. Government that spends is distributing money into the economy and it gives the dollar its value. All of these acting in concert together give the dollar its value.
The exnihiloistas say we could use bingo chips and they’d have value too, and they’d be right.
Today, interest rate risk constrains the US from borrowing unlimited dollars to fund government spending. To be clear, the risk is minimal for now, but it could become serious in the future. One way that could happen is with a sudden rise in interest rates following a debt default. With seigniorage, could the US really spend as much coin as it can issue? Won’t the currency lose its value in an inflationary spiral? That's not an immediate concern either. Inflation appears when the economy can’t produce enough to meet demand. Inflation isn't here now, even when the doom and gloomers predicted it would be at the current rate of government spending. It’s not here because the number of people unemployed and the wage stagnation of those who are employed results in weak demand. If there is a constraint, it would be at the point where government created enough jobs and a wage scale that recognizes the value of labor so that inflation could develop. The US is a long way off from that.
Are there other constraints to consider if the present monetary system was scrapped and the government funded itself by seigniorage instead? That’s where the conversation begins. (I took the long way around the horn to get here, didn't I?) The question isn't whether a platinum coin, or a T-Bill, or a bingo chip has value or an advantage over another token. The question is what constrains the system. For example, the availability of resources is a constraint. No matter how much currency is issued, it can only buy as much as labor can produce at maximum capacity.
There is another constraint and it’s one that’s particularly relevant today. In a representative democracy like ours, it’s the control that citizens have over those who are in positions of power in the economic system. A progressive utopia could become reality. All the US has to do is buy it. The untapped vast wealth fiat money makes available is truly that powerful.
Now, imagine Mitt Romney in charge of it. Imagine his pal Donald Trump in charge of it. What if David Koch were at the levers of power as the full potential of fiat money were unleashed?
There’s the constraint. Be careful what you wish for.
6:36 PM PT: Thank you for the spotlight. I appreciate it.
To readers who make it through to the end of these long-winded words, it isn't so much an editorial opinion piece, as an invitation to untether from what we think we know is real, and consider for a moment the possibility of the unreal.