Every time I think I understand how modern money works, I learn about something like this.
Ultra-large denomination bills are a relic. They preceded computerized records as an immutable record of interbank transfers.
For example, say someone in New York sends someone in San Francisco $100 million. Settlement-wise, the New York bank reduces the sender's deposit balance and moves reserves from its New York Fed reserve account to the New York Fed itself. The New York Fed moves these reserves into the San Francisco Fed’s account at the New York Fed. (These could, at the San Francisco Fed's option, then be couriered across the country.) The San Francisco bank, in turn, gets $100 million deposited into its reserve account at the San Francisco Fed and creates a deposit in the recipient's account.
Keeping track of all of the above is complicated. Physical settlement, in a country without the telegraph, reduced the risk of errors. Moving around tonnes of cash is inconvenient. Hence, super-large bills, used solely for the settlement layers above.
Considering inflation a $100 note today is comparable to a $10 note from just a few decades ago. Thus currency denomination should shift in the opposite direction eliminating the cent and nickel, and adding larger notes.
Bypassing Congress seems to be the main thrust of the plan since, if Congress wanted to, they could pass whatever laws they like. This is, Congress could get a similar effect without actually printing a coin if they wanted to.
The issue seems to involve some complicated interactions. For example, Congress likely doesn't want such printing as it may weaken America's reputation for economic integrity. Also, it seems that a lot of modern politics centers around Congress having regular battles over the budget, such that breaking that paradigm would seem to shift American politics away from the current status-quo.
True, but only in the same sense that you could theoretically spend a barrel of oil at the store. The "legal tender" language you see printed on US currency is unrelated to commercial transactions. To the extent that it still has force, it comes from laws governing financial transactions -- specifically, if someone gets a court judgment that you owe them something, they have to accept currency.
You could (again, totally theoretically) pay for dinner with a Titan at any restaurant in the UK, but restaurants in the USA are not required to accept Social Security bonds as payment, so even if you had a million dollar bond in your pocket you could end up in jail for failing to pay for your meal.
Just to clarify: no, you cannot spend a barrel of oil (or Social Security bond) in the same sense as you could spend a 100 million pound note.
This is not true. The restaurant can only be compelled to accept the dollars if they sue you and get a judgment against you. That judgment will be denominated in dollars, and if you present that amount of dollars you'll be free of your obligation to the restaurant. (Even if they refuse to take them.)
For the common case of a parking garage that charges dollars to park and won't take $20 bills, that garage is entirely on the right side of the law, and you cannot legally compel them to take the twenty, regardless of the text "this note is legal tender for all debts, public and private" printed on it.
You eat at a restaurant, and offer to pay with a barrel of oil (or bond). The restaurant sues, and the judge orders you to pay money, and the restaurant does not have to accept the barrel of oil. You were not able to spend the oil (or bond).
You eat at the same restaurant, and offer to pay with a Titan. The restaurant refuses, and sues. The judge orders you to pay with money, and you offer up the Titan again. The restaurant must either take the Titan, or give you the meal for free. You were able to spend the Titan.
Businesses can decide whether or not to accept certain denominations at the point of sale, but if all I have is a $100 bill and a service has already been rendered, they can either take the $100 bill then, or sue me and take the $100 bill later. That is not the case with a barrel of oil.
So for the last time: no, you cannot spend a barrel of oil like you can a 100 million GBP note. You cannot spend a bond like you can a Titan (this is the distinction that set off this chain of comments). Banknotes issued by the Bank of England are legal tender in the UK, bonds are not.
Really solid argument here.
I notice you switched my example from a parking garage to a restaurant. The normal model of a restaurant meal is that the restaurant gives you food, and then, later, you owe them money. Without settlement, you owe them a debt. You were only able to spend the Titan by tricking the restaurant into giving you free food. It's very rare for commercial transactions to take this form, of complete delivery by one side followed only after delivery is complete -- and the delivered goods have been destroyed -- by any payment whatever.
The model of a parking garage, by contrast, is that you give them your car and then, later, you want to buy it back. Until you choose to pay in a manner they accept, they'll keep your car. This isn't much of a victory for you.
> So for the last time: no, you cannot spend a barrel of oil like you can a 100 million GBP note.
Once again, yes, you can. Try to spend a 100 million GBP note. You'll find that you can't. (Among many other more serious problems, how would the other party make change?) It's easier to spend the barrel of oil, and you do that on the same terms -- raw negotiation -- that apply to the note.
For example, say someone steals a trillion-dollar coin; would Forbes rocket them to the top of the richest-people list? And could they ever actually spend the coin in any way?
I mean, sure, the coin'd have value as a piece of artwork, but no one'd seriously regard it as actual money.
When I was there locals have draws full of everything from 10 billion up to the 100 trillion note.
They are utterly worthless now, except for tourists who pay $50 for them at Vic Falls.
For anyone curious, I kept a single bank note from all of the 35 countries I recently drove through in Africa . There are some really fun ones in there like the Congolese Franc, etc.
They're worth a lot more now as collector's items, than they ever were as actual currency.
Just regular stamps.
It's just a way to say the debt ceiling is dumb, that when Congress appropriates $X then that also comes with inherent authority to spend $X.
It's funny to watch the block chainers come to this realization too. "Bitcoin is hard money! Finally we have an 'objective' currency!" ... then someone forks the chain and makes a new coin. Now there is twice the "money" in circulation, with holders on the old chain now also holding some other coin in the forked chain.
But what about gold? Why is it that we find a certain non-reactive yellow metal so valuable? Answer: because we have implicitly agreed to do so. If we all decided gold was worthless as money its value would collapse to something more on par with its value in terms of its industrial uses. Right now it trades far above that because we like to stockpile it in warehouses and use it as a large-scale "store of value" to back currencies and stuff.
If that were the case, then the price of gold would drop. Demand would decrease and the price would fall. In fact, this happened during the last financial crisis, because of a strong dollar and deflationary pressure. In terms of dollars, gold will always do very well, though. Here’s why.
The thing central bankers (they’re really central planners) don’t understand is that markets are forces of nature. You cannot tame this force of nature anymore than you can stop a hurricane.
The fiat currency scheme will eventually collapse, because it produces distortions in the market. The key piece of evidence is when the Fed had to print 85 billion dollars last week because the overnight repo rate skyrocketed to something like 10%. The interest rate is a proxy for credit risk. What that tells you is the house of cards is about to collapse, because the market will not allow distortions like negative interest rates or negative yielding debt. It is simply illogical. As a creditor I will not lend someone money and agree to receive less than I originally lent out. Additionally, the real interest rate is probably around 10-15%, and the Fed will continue to need to print money, which will depreciate the dollar (money itself follows supply and demand. Increase supply and what happens to price?). All of this is very good news for gold.
If like here many banks request overnight money then the interest rate goes up (interest rates are just prices for money in the future quoted differently -- high price to the lender = low interest rate). The same market forces apply to the good "money redeemable in n days".
Sadly the WSJ story is behind a paywall:
I’ll never forgive Rakuten for buying a community and shutting it down.
How does this whole platinum coin exchange change their situation?
Aren't they still owned money?
Initially when the coin is minted, yes, they are still owed money. Nothing has changed for them.
Eventually, the treasury bonds that they hold will expire and the government will pay them back. At this point, they would usually just buy new treasury bonds. However, if the government stops issuing new treasury bonds after minting the coin, then they will no longer have that option. They could buy other (foreign government or corporate) bonds, but the money they use to do so just changes hands. It ultimately stays in the system at some bank account, which ultimately translates to high-powered money held by a commercial bank in a Fed account, where it only earns interest as long as the Fed pays interest on reserves.
Does that really change anything? Arguably no, other than possibly interest rates, but interest rates are near zero anyway.
The trillion dollar platinum coin idea is an absurd exercise that people only suggested because US politics is absurd to begin with: congress orders the US government to spend money (via the budget bill), but then forbids the US government from actually implementing that spending in practice (via the debt ceiling and refusing to raise taxes). Congress wants to eat the cake and have it too. That is the reckless behavior here: putting the US government into a completely Kafkaesque situation. The way I see it, the platinum coin is mostly a rhetoric tool to highlight just how messed up the system is.
I believe it is actually even worse than that, because many government purchases of goods and services are pay on delivery. The budget authorizes some department or agency to make a purchase, they do so, and then later after the purchase is delivered and the bill presented--the department or agency can't pay the bill because of the debt ceiling.
The debt has already been incurred, so the debt ceiling does nothing to reduce the deficit or the national debt--all it does is stop us for making payments on debt already incurred.
The way this works out is that every single dollar is worth slightly less after minting this coin.
This is why QE didn't trigger inflation in a normal way - minted money was exchanged for bonds (financial assets) not spent on goods and services.
So this is essentially free money. Any legitimate organization would need to provide a legitimate good or service.
So if they are going to keep printing free money and play monopoly they should at least go buy people something like free healthcare. They always try to defend this with the "we are smarter than you" BS...stuff which I studied formally my degree.
Meanwhile the money printed for QE was spent buying shares and bonds, and relatively few of those shares and bonds were from the troubled banks. This was all on the Fed balance sheet.
Not that I'm a gold standard zealot, bitcoin self-deluder, or the like, but fiat currency is ridiculous, yet it's the basis of the global economy.
If you think this, it's almost certainly because you don't understand it.
The basic concept is incredibly simple: it's an abstraction of value which allows us to avoid having to barter directly with actual goods.
Gold and Bitcoin allow you to implement exactly the same thing, but with specific built in supply constraints that aren't connected to the underlying economy. This is a problem for both commodities being used as currency. Ideally, the money supply should be able to expand to reflect the wealth in the underlying economy - otherwise, you get severe inflation or deflation, both of which have negative effects.
Of course you didn't say what aspect(s) of fiat currency you consider ridiculous. If you're just saying that governments are too free with their manipulation of the abstraction, there's some merit to that. But that's not a problem with the concept of fiat currency.
Say what? Severe inflation is very often caused by how banks and central banks manipulate the money supply, which is much more difficult if the economy uses money with restricted supply.
You say that fiat money is connected to the underlying economy, but the supply is really controlled by central banks and regular banks. If we're being nice then they indeed do their best to follow the market, but they can never be perfect and sometimes outright bad at it. It's the same reason why planning economies doesn't work, the market is far too complex to predict.
And of course this will have negative effects.
> If you're just saying that governments are too free with their manipulation of the abstraction, there's some merit to that. But that's not a problem with the concept of fiat currency.
Having the ability to freely control the money supply indeed makes the problem of government (rather bank and central bank) manipulation worse, and to a large extent it's what makes it possible. Yes you can create an abstract IOU-Bitcoin too, but there's no lender of last resort to bail you out when you fail, so you'll have to be much more careful if you decide to do it.
If anything we know that we can't rely on good governance, not just from the appalling current administration but the forty years of pro-rich economics that have exacerbated our descent into indolent oligarchy.
Therefore our currency is based in an assumption of confidence and ability of the adults in charge. Which we in w to be utterly bankrupt.
Your definition of abstract value applies to the concept of currency.
Fiat currency is an abstraction of the abstract... That relies on people's visceral sensation of the utility of money in the current moment to serve as the only tangible aspect, and substitute for any real value.
Which we know is an illusion, based on a declaration. A "Fiat".
My issues with currency are very very deep. Money exists in the modern world where billion year evosystem destruction is converted to short lived production and temporary utility .. with the imbalance of wealth it is even more vapid and shallow.. And money is the laundering mechanism along with "limited liability" to enable this mass sociopathy.
That it doesn't even represent anything in reality is the icing on the turd cake.
At least the remnants of previous empires have their idols of gold. Ours will just be bits on a flash drive.
Computer archæologists disagree.
That is, people are willing to invest (cash or labor) in a company in exchange for dilutable stocks, because they expect that if dilution happens, it's a transient discontinuity on the way to making the stocks more valuable overall. By taking another round of funding, the investors' stocks hopefully become worth more than they were before dilution.
Don't people with large holdings of fiat currency have the same approach and risk tolerance? The purpose of raising the US debt ceiling would be to grow the US economy.
The main reason to raise the debt ceiling is that we are carrying a percentage of debt (which has market stabilizing effects), and our assets are growing, so we should be spending more. And practically this is money already spent so this is arguing about paying the bill after eating the meal. The fact that this is somehow contentious at the highest levels of government speaks to either bad-faith acting or complete financial illiteracy.
If you owe the bank $100,000 you have a problem, if you owe the bank $10,000,000 the bank has a problem.
Minting the coin only cuts the bankers future profits, which - as it's a zero sum game - benefits the worker class in the long term.
The point here is about constitutional law, not so much monentary policy. The US constitution grants to congress the exclusive power to assume debt on behalf of the government, the president and executive branch can't do that. But congress tends to be paralyzed by partisan institutions (the filibuster et. al.) and can't act with agility to issue debt in response to deflationary stimulus.
BUT, it turns out that the mint is allowed (by a law passed by congress) to print money in any amount it wants as long as it's done via a platinum coin. So you can just print a coin and use it to pay off any debt you want. Instant spending.
It's a cute loophole, really, and a joke about the way american government works. It's not a serious idea about economics.
A. Actively controlling an exchange rate through foreign debt purchasing and capital controls to sidestep rules on tariffs, and
B: Having someone float an idea to work around a bizarre loophole in the federal budget law?
Ignoring the fact that this didn’t even happen, it also has really nothing to do with adjusting currency values.
There were many parts of this Wikipedia page, the parts talking about how it would be technically legal but counter to our traditions of checks and balances, that honestly seem quaint in a post-Trump era. I don't say this to be explicitly political, but Trump has made it 100% clear he won't be constrained by any "traditions". I mean with defense money being rerouted to pay for the wall despite not being allocated for this, the president directing members of the executive branch to just break the law and build the wall and then say he'll pardon them if they are prosecuted.
As you said, Congress passed the debt ceiling, then approved spending above that limit without approving ways to pay for it. And it refused to raise the debt ceiling. That’s not really part of the system of checks and balances; that’s Congress getting itself into a bind by passing legislation that can’t actually be satisfied.
Edit: the post I originally replied to said “this person hates America. Ignore.”
Just to give some context on my comment.
1. Increasing/decreasing money supply. Usually buying or selling debt denominated in the nation's own currency.
2. Currency manipulation aka foreign exchange market intervention. Buying or selling foreign currency to in exchange for domestic currency. Countries can try currency manipulation to adjust balance of payments or to gain unfair competitive advantage in international trade.
Chinese central bank is free to manage their money supply without criticism.
I hope this clarified things for you.
Obviously people "like" what is in their interest, and "don't like" what isn't... Simple self-interest.
One of the most harebrained schemes hatched to date, "dubious".
Modern problems require modern solutions