By Neil Paynter
Our editor-in-chief recently had a bit of Twitter repartee with Joseph Firestone, who has a notion for the US Mint to issue coins to cover the budget deficit. You can read it here.
While technically a legal and mechanically achievable notion, it is nevertheless a terrible idea. Why? Because of the great increase in the money supply which would occur as a result.
When the Federal Reserve System buys an asset (whether a Treasury Bond or a Millard Fillmore dollar coin) it creates a counterbalancing liability – either the paper note in your billfold, or deposits of the US Treasury and of member banks. If the Fed were to buy seriously overpriced platinum coins to the tune of two trillion, the Treasury would simultaneously have two trillion to play with.
This sort of instant free money manufacture, known as seigniorage, has been around as long as governments have been issuing official money. It has proved a fine little income stream to governments so long as it has not been abused. When used to excess however, it rapidly debases the currency and occasions the many woes of debasement and chronic, high inflation.
Would suddenly expanding the U.S. money supply by two trillion cause an inflationary problem? Well, the Federal Reserve just so happens to be engaging in exactly that experiment at this very moment. In less than three years the liabilities of the Fed have increased from 900 billion to 2,900 billion. Amazingly, there has not yet been any runaway price inflation. I write amazingly since it is an historical necessity that the purchasing power of a currency will decline in line with the increase in its supply. It is just a matter of time until the three-fold increase in the Fed balance sheet will be reflected in a three-fold increase in prices in general.
A further two trillion on the Fed balance sheet will bake into the cake a five-fold increase in prices from 2008 levels. This could mean $20 per gallon gasoline. The almighty dollar might not even buy so much as a decent egg. Wages would eventually creep up, but overall the process would be painful, and even devastating to those on fixed incomes.
The US is already facing the prospect of significant price inflation in the coming years, and the platinum coin deficit plug will just make the pain that much worse. Mr. Firestone, who authors a work called Riskonomics: Reducing Risk by Killing Your Worst Ideas, should take his own advice and kill off this one.
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