I Am A Video Camera

The legislature of Oregon is talking about imposing a special penalty tax on high-mileage cars. Yes, on high-mileage cars.

The idea isn’t quite as stupid as it sounds. The state of Oregon has to pay for roads out of tax money and typically that means gas taxes. Which makes sense: the more you drive, the more you benefit from roads, and the more you drive, the more gas you use and and the more gas-tax you pay. It works out fair for everyone. High-mileage cars disrupt that system: you get a lot of benefit from the roads without contributing much to their upkeep. The high-mileage penalty is intended to compensate for that.

Still, the idea is pretty stupid. High-mileage cars typically produce less pollution and by definition use less gasoline, lowering the price of gas for the rest of us. That they get cheaper use of the roads seems only fair.

And at “pretty” stupid, that idea is sheer, Einstein-level genius compared to another that’s being bruited about by such luminaries as Paul Krugman, the trillion-dollar coin.

Right now, the US government’s ability to borrow is limited by the debt ceiling, a law that says the government is “only” allowed to spend about $14 trillion more than it takes in. At this moment, the government is about to hit this ceiling.

If the ceiling isn’t raised, well, no one’s sure what will happen, but one possibility is sovereign default: the US government fails to make payments on the principal and interest for its existing gargantuan debt. If there is a sovereign default, again, no one’s sure what will happen, but everyone is quite sure that it will be very, very bad. Even contrarian I am in agreement there.

There’s a loophole there. Various laws controls how much money is borrowed, how much is money is printed, even how much money is coined from silver, gold, and base metal. Through an oversight, there’s no law controlling how much money is minted from platinum.

So here’s the plan: the Treasury makes one single platinum coin. It doesn’t even have to be very big, just big enough to read “One Trillion Dollars”.

Now the US government is in possession of an additional trillion dollars, which it can spend to pay off its creditors, build bike-paths, subsidize money-losing businesses owned by friends of the administration, invade far-away countries, all the things it does today.

Why is this pretty much the worst idea ever? To make a long explanation short, because it will destroy the US and the rest of the world with it.

If you need a longer explanation, here goes: right now, there’s about $10 trillion floating around. Currency, coins, travelers’ checks, checking accounts, money-market, all the things that are cash or essentially equivalent to cash.

We mint that coin, though, and all of a sudden, there are $11 trillion floating around, but unfortunately, the exact same amount of stuff to buy. More money chasing the same amount of goods only means one thing: inflation. Something that cost $10 yesterday — one trillionth of all money — will cost $11 tomorrow, because it’s still worth one trillionth of all money!

Inflation is good, in the short term, for some people. Let’s say you own a house worth $1,000,000 and there’s $500,000 mortgage against it. Your assets include one-half of a very nice house. Then the trillion dollar coin inflates the currency. Now your house is worth $1,100,000 (of the less valuable currency), but you still only owe $500,000. You now own 55% of the house!

Your salary, nominally the same, is worth less, but you can go to your boss and say, “I need a COLA (cost-of-living adjustment).” And you’ll get it too! Or else you can get a new job, where your new employer will be happy to pay you 10% more, since the dollars are now worth 10% less.

The bank cannot do the same, of course. They cannot say, “Sure, we only lent you $500,000 but with this sudden inflation, how would you feel about paying us back $550,000?” Well, they can say it, but you’ll laugh in their face.

Inflation represents a huge transfer of value from people with dollar-denominated assets to people with dollar-denominated debts. The US government, as the biggest holder of dollar-denominated debts in history, is naturally enthusiastic about this plan.

So why is this the worst idea ever? The government gets out of a tight spot, you and I rip off some banks, everybody’s happy, right?

No, because it doesn’t last. The day after tomorrow, you are going to need a new mortgage and the US government is going to need to sell some more bonds. Potential lenders, having been burned once, are going to demand a higher interest rate next time around. Soon, the government is back in a tight spot, and once again, there’s the simple obvious solution: another trillion dollar coin.

Anyone who has ever struggled with an addiction will recognize the pattern. The first time, the first drink, the first hit, the first game, is pure fun. Then you begin to feel the after-effects, and you realize nothing would be nicer at this moment than a second hit. The third one is just maintenance, the fourth is desperation. Eventually, the addiction takes over your life.

Think it cannot happen to an entire country? Happens all the time. In the 1980s the Zimbabwean dollar was roughly par with the US dollar. Then inflation was adopted as government policy, then hyper-inflation. Prices would double every year, then every month, then every day. By November 2008, inflation was — and let me warn you now, my zero key is not stuck — 89,700,000,000,000,000,000,000%. At that point, Zimbabweans collectively realized there wasn’t much difference between the Zimbabwean dollar being worth a 2,621,984,228th of a dollar and being worth nothing, and the money was abandoned.

Is it inevitable? Mmmm, not 100% guaranteed, but you and I don’t take meth, despite the fact that we might not get addicted.

And don’t forget, Zimbabwe got very very lucky. All that happened was their economy collapsed, and a few tens of thousands of their poorest citizens starved.

Something much worst happened in the 1920’s. The Weimar Republic, crippled by reparation payments from losing the recent war, faced tremendous debts and decided to take the same steps that commentators are urging on Obama: they just created the money they needed out of thin air. Hyperinflation took the Reichsmark from roughly a dollar to 4 trillion to the dollar. The Weimar government was replaced by the Nazis, and to summarize, it didn’t end well.

6 thoughts on “I Am A Video Camera

  1. This is reminiscent of Peter Schiff (and others), who warned, “This is hyperinflation; this is Zimbabwe; this is the identical monetary policy of the Weimar Republic” four years back. Instead, inflation is under 2%.

    (As an aside, from wikipedia: “Some economists, however, point out that Hitler’s rise was immediately preceded by the 1931 economic crisis, which, while also being partially triggered by Germany’s debt, was, unlike the hyperinflation crisis of 1923, characterized by massive deflation created by a government austerity program.” So advocating austerity can also be used for Weimarian Godwinism. http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic)

    Minting a $1T coin and putting it in the Fed does not increase the money supply any more than raising the debt ceiling does. And increases in the money supply do not linearly correlate to increased inflation ( http://www.nowandfutures.com/images/m3_credit_cpi_money_supply_and_inflation_link.png ) and certainly not “tomorrow”. If only economics was that simple.

    But increased money supply doesn’t create inflation at all in a liquidity trap. ( http://www.businessinsider.com/chart-of-the-day-money-supply-vs-inflation-2009-6 )

    As for the banks, they also don’t change the terms of a loan when interest rates decline. Inflation is not a “rip off” of the banks.

    The suggestion that the government can become “addicted” to minting the $1T coin is perplexing. The government can already spend more than it has by raising the debt ceiling. Why would the coin make it any easier? Indeed, when Congress–who constitutionally controls the finances–approves spending that requires additional debt, it’s irresponsible to refuse to allow the level to increase. If they don’t want it higher, they shouldn’t approve spending that increases it. And if the Executive mints a coin that covers Congress’ spending, that doesn’t allow additional spending just because there’s money “in the bank.”

    Oh, and I don’t know about you, but I wouldn’t use meth even if I was sure it wasn’t addicting.

    But that Oregon tax…zounds!

  2. Harvey —

    First, thanks for your thoughtful reply.

    To answer your question, “Why would the coin make it any easier [to spend more]?”, res ipsa loquitur: this coin is being proposed exactly because it’s easier! The action lies entirely within the authority of the Secretary of the Treasury, and doesn’t require the approval of a fractious and divided Congress.

    Banks don’t change the interest when rates go down but with most consumer loans, the debtor is free to refinance. Of course, this “risk” is priced into the loan in the first place.

    (And yes, it’s a huge simplification to say that a 10% increase in the money supply causes exactly 10% inflation — but actually, I think it would cause much more inflation than that, as the act would make dollar-denominated assets much riskier and less attractive.)

    It’s also misleading to call it irresponsible for Congress to refuse to authorize debt for spending it did authorize: the irresponsible part was the spending, and that’s what should be undone.

    • Not sure why you “think” the coin trick would cause much more inflation when, as noted, large deficits haven’t caused any inflation since entering the liquidity trap. It may seem intuitive, but it just hasn’t played out that way. (And this isn’t the first example of a liquidity trap.)

      That deficit spending in a post-financial crisis is bad (much less irresponsible) is a very debatable subject. Even the IMF has started to reconsider the role of austerity in a weak economy. But if you’re going to legislate deficit spending (which even the Ryan budget would have done), how can you not authorize the funds to cover that spending? “Irresponsible” is probably not the best word for it.

      • Obviously, I am not the Keynesian you are, but clearly at SOME point, large increases in the money supply (including large deficits) must cause inflation — if not, why NOT just print money to pay off all our debts?

        If you can concede that some amount of deficit spending is too much, then the remaining question is, are we at that point yet?

        Krugman never tires of pointing out that (fairly) simple calculations showed all along that the Stimulus wasn’t nearly big enough. OK. On the other hand, a sensible person might ask, how much headroom is there between “big enough” and catastrophes like Greece, Zimbabwe, and Weimar?

        For myself, I don’t favor Keynesian intervention exactly even if I really were convinced there’s an amount of deficit spending between “not enough to do any good” and “too much to survive”, I certainly don’t trust the goobers who run our government to find it.

        See http://www.blueapsara.com/?p=132

  3. I may not be the Keynesian you think I am, but in any case this discussion is drifting too far from the original post which declared the $1T coin would almost certainly cause hyperinflation, possibly leading to Nazis (or something like that). Lots of people strongly disagree (including little ol’ me, obviously), for reasons previously stated.

    If you post your views on deficit spending and budgets, maybe we can discuss there (if I read the post…sorry, I don’t catch them all). Your linked post on some version of Keynesian economics offers a view of it that don’t correspond with my limited understanding of it, but again, that discussion doesn’t belong here.

    Your opinion of the government goobers, though, is hard to dispute.

    It’s been fun.

    PS I don’t see any way here to “subscribe” to comments on a post, which means I only see them if I keep checking back. If there’s an option to allow visitors to stay updated on the thread, that would be a nice enhancement for future discussions.

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