Why not diamonds?
“Will you take half this diamond for your laptop?”
“brb gotta try and cut this damn thing in half.”
Not to mention that even if the diamonds were easily divisible, they would not retain their value. A single diamond of 1 karat is worth more than four diamonds of a quarter karat each (of the same quality).
Unlike gold, diamonds lack the characteristics that make emergent money stable and suitable as currency. As I’ve noted, such ‘money’: “(1) must be relatively imperishable (retain its value over long periods of time without decay), (2) must be easily divisible without losing value, (3) must be malleable and ductile, able to be shaped into more convenient and portable forms, (4) must remain stable in a wide range of temperatures and climates, (5) has never been worth nothing (has intrinsic value, or rather value as something other than an intermediary of exchange), (6) must be fungible (an ounce from one source would be equal and identical to an ounce from another source), (7) supply is finite without being so rare as to be difficult to use (relative scarcity), (8) new supply is relatively uncommon and difficult to acquire, (9) has a long-standing history of being used as currency, and above all else (10) free people have used it as a medium of exchange or intermediary of trade.”
Although many were up in arms when the Fed said it would buy $600 billion in government debt outright for the previous round, QE2, all seems quiet about the magnitude of QE3 because it doesn’t come with huge up-front total price tag. But by year’s end the Fed’s balance sheet could hit $4 trillion. With no recovery in sight, where’s all this money going? It is creating bubbles. Bubbles in the housing sector, the stock market, and government debt. The stock market has been hitting record highs for the past two months as investors seek to capitalize on the Fed’s easy money. After all, as long as the Fed keeps the spigot open, nominal profits are there for the taking. But this is a house of cards. Eventually, just like in 2008-2009, the market will discipline the bad actions of the Fed and seek to find the real normal.
Although many were up in arms when the Fed said it would buy $600 billion in government debt outright for the previous round, QE2, all seems quiet about the magnitude of QE3 because it doesn’t come with huge up-front total price tag. But by year’s end the Fed’s balance sheet could hit $4 trillion.
With no recovery in sight, where’s all this money going? It is creating bubbles. Bubbles in the housing sector, the stock market, and government debt.
The stock market has been hitting record highs for the past two months as investors seek to capitalize on the Fed’s easy money. After all, as long as the Fed keeps the spigot open, nominal profits are there for the taking. But this is a house of cards. Eventually, just like in 2008-2009, the market will discipline the bad actions of the Fed and seek to find the real normal.
— Ron Paul
In the 1920s as now, fashionable opinion could see no major crisis coming. Then as now, the public was assured that the experts at the Fed were smoothing out economic fluctuations and deserved credit for bringing about unprecedented prosperity. And then as now, when the bust came, the free market took the blame for what the Federal Reserve had caused. It is fitting that a century of the Federal Reserve should come to an end at a moment of economic crisis and uncertainty, with the central bank’s leadership confused and in disarray after the economy’s failure to respond to unprecedented doses of monetary intervention. The century of the Fed has been a century of depression, recession, inflation, financial bubbles, and unsound banking, and its legacy is the precipice on which our economy now precariously rests.
In the 1920s as now, fashionable opinion could see no major crisis coming. Then as now, the public was assured that the experts at the Fed were smoothing out economic fluctuations and deserved credit for bringing about unprecedented prosperity. And then as now, when the bust came, the free market took the blame for what the Federal Reserve had caused.
It is fitting that a century of the Federal Reserve should come to an end at a moment of economic crisis and uncertainty, with the central bank’s leadership confused and in disarray after the economy’s failure to respond to unprecedented doses of monetary intervention. The century of the Fed has been a century of depression, recession, inflation, financial bubbles, and unsound banking, and its legacy is the precipice on which our economy now precariously rests.
Imagine that someone proposed that the key to establishing social justice and restraining corporate greed was to establish a very large corporation, much larger than any corporation hitherto known—one with revenues in the trillions of dollars. A corporation that held a monopoly on some extremely important market within our society. And used its monopoly in that market to extend its control into other markets. And hired men with guns to force customers to buy its product at whatever price it chose. And periodically bombed the employees and customers of corporations in other countries. By what theory would we predict that this corporation, above all others, could be trusted to serve our interests and to protect us both from criminals and from all the other corporations? If someone proposed to establish a corporation like this, would your trepidation be assuaged the moment you learned that every adult would be issued one share of stock in this corporation, entitling them to vote for members of the board of directors? If it would not, is the governmental system really so different from that scenario as to explain why we may trust a national government to selflessly serve and protect the rest of society?
Reminds me of the Hoppe quote I posted a few days ago.
Central planners cause chaos; free people create order. - Tom Woods
Start video at 7:30. Worth your time, particularly if you haven’t read Woods’ Rollback and Meltdown.
Related: The Magical Trillion Dollar Coin.
There’s been lots of discussion lately regarding the minting of a “trillion dollar platinum coin.” The scheme was first promoted by Krugman less than a week ago, and has been discussed heavily the last few days - with “progressive” statists diligently supporting the cause.
Yesterday, Paul Krugman noted:
Should President Obama be willing to print a $1 trillion platinum coin if Republicans try to force America into default? Yes, absolutely. He will, after all, be faced with a choice between two alternatives: one that’s silly but benign, the other that’s equally silly but both vile and disastrous.
So, Krugman is in support of minting a platinum coin and declaring its value a trillion dollars. And why wouldn’t he be? This is not, functionally, any different than what the Fed and Treasury do now. The Fed creates “money” as simply as typing on a keyboard.
Philip Diehl, “the former Mint director and Treasury chief of staff who, with Rep. Mike Castle, wrote the platinum coin law and oversaw the minting of the first coin authorized by the law,” explains how money can be simply divined out of thin air:
The accounting treatment of the coin is identical to the treatment of all other coins. The Mint strikes the coin, ships it to the Fed, books $1 trillion, and transfers $1 trillion to the Treasury’s general fund where it is available to finance government operations just like with proceeds of bond sales or additional tax revenues. The same applies for a quarter dollar.
Indeed: the same applies to all fiat currency. Therein lies the problem.
But back to Krugman: as is customary with him, it is a game of partisan politics. His opponents are, naturally, evil dolts who wish to see the world burn for their own selfish profits (in that very piece he calls them “ruthless” and “crazy”). In truth, this is a charade he must maintain so that people don’t catch on to how much the two major parties actually have in common. The alternatives are default and inflation, as he notes. But in truth, by paying debtors with money valued less than what was borrowed, inflation is merely a slower form of default. So Krugman makes a distinction without much difference.
What Krugman is peddling here - what he’s pretty much always peddling, to be honest - is magic:
Enter the platinum coin. There’s a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector’s items — but that’s not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all.
Here, again, is Diehl:
Once the debt limit is raised, the Fed could ship the coin back to the Mint where the accounting treatment would be reversed and the coin melted. The coin would never be “issued” or circulated and bonds would not be needed to back the coin.
So it’s like the coin never happened! It’s all make-believe money… so what, then, are the debtors “receiving”?
Diehl, too, believes in the magic of this make-believe money:
There are no negative macroeconomic effects. This works just like additional tax revenue or borrowing under a higher debt limit.
This is magical thinking, and like Tinkerbell and Santa Claus, they need you to believe for the pixie dust and reindeer to take flight. How can such activity do “no economic harm at all” or have “no negative macroeconomic effects”? If I paid a debtor back with pennies on the dollar, would he feel no economic effects? Would our future economic activity not be harmed?
And if this works “just like additional tax revenue or borrowing,” then why must there be any taxes or borrowing at all? Why not just mint trillion dollar coins ad infinitum? And why not mint a quadrillion dollar coin and profit? And why don’t we all do this? If there are truly no negative economic consequences to simply declaring something with little value as having higher value and paying debts with this “money,” then why aren’t all homes installed with counterfeiting machines as a means to economic prosperity?
Explaining this magic Keynesian thinking, Krugman actually puts his foot in his mouth a bit:
It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.
For starters, he’s using the modern lie that monetary expansion is not inflation. As I have frequently noted: this is a purposeful shift in definition to obscure the cause (monetary policy) from the consequence (price increases): “By divorcing the word from its literal origins, [central planning apologists] cloud the direct effect between money printing and the value of money. This is not unlike suddenly using the word dog to instead refer to dog piss.”
But here he admits a couple of things he doesn’t tend to. Notably, he states that printing money does cause price inflation, just not “under current conditions.” Of course, he has a long track record of always finding ways to make “current conditions,” whatever those may be at the time, just right for printing money. Still, he’s exposed himself. Furthermore, he concludes that this process of turning government debt into “debt held by the public” as “doing no economic harm at all.” I wonder: if my student loan debt eventually turned into debt held by Krugman, whether he would conclude that it did him any economic harm.
In any case, let’s understand, specifically, this trillion dollar coin a little bit and why it is completely laughable.
First, let’s assume that it is a full one ounce platinum coin. Currently, such a coin has a spot price of approximately $1,500 (and is actually $100 less than a gold coin - but a gold coin doesn’t sound as impressive, does it?). So what is this coin’s true market value relative to the fiat value that Krugman and his cronies wish to “impart” on it?
$1,500 out of a $1,000,000,000,000 is 0.00000015%. That’s 3/2-billionths of a percent.
Most people have a hard time conceptualizing very large numbers, myself included, so let’s think of it another way. That is approximately the same relationship between one M&M and 400,000 5lb bags of M&Ms. Imagine eating ten pounds worth of M&Ms every single day (that’s a hundred ”servings” a day) for 550 years. That’s eating 35 M&Ms every single minute of every single day of every single month of every single year, without sleep, for nearly eight lifetimes. Now contemplate the value of a single M&M in that context. That’s the same relationship one penny has with the combined values of twenty $10 million mansions.
Its value is negligible. It is, essentially, zero.
So using a platinum coin is merely ceremonial. It is a way to give something the appearance of value since, again, most people have a hard time conceptualizing very large numbers.
In truth, the platinum coin has basically the same value, relative to a trillion dollars, as this:
But if monopoly money were used, then people might soon realize that the federal reserve notes in their wallets are hardly any different (as Diehl admitted: it is the same “accounting treatment”) - and as such people may begin to question the legitimacy of the entire Keynesian/monetarist enterprise.
And we can’t have people learning the truth, now, can we?
With some free time today, I thought it would be interesting to visit the Philadelphia Federal Reserve - specifically its “Money in Motion” exhibit. It felt good traipsing around the displays laughing at the content while proudly wearing my Hans-Hermann Hoppe “Privatize Everything” t-shirt. There was even one area that asked people to determine if a federal reserve note was “real money” or counterfeit - I slapped the “fake” button every time. After a while, though, I needed to get out as my nausea was beginning to overtake me.
The exhibit was… whatever the opposite of “honest and enlightening” is. Notably, and of course predictably, the “What is inflation?” display defined inflation as merely “an increase in the overall level of prices,” instead of what it actually is: an expansion of the money supply and that price inflation is purely a consequence of monetary inflation. This, as I have noted many times before, is a purposeful shift in definition to obscure the cause (monetary policy) from the consequence (price increases): “By divorcing the word from its literal origins, [central planning apologists] cloud the direct effect between money printing and the value of money. This is not unlike suddenly using the word dog to instead refer to dog piss.”
But amidst the half-truths, misinformation, and outright lies there was something I found ironically honest, if only the average observer would be able to piece the truth together. In the “Early Money in America” display was a short nugget on wampum:
“Small, rounded shells with holes drilled through their centers were threaded onto strings and used as a primitive medium of exchange between Native Americans. The first colonists soon learned to use this Wampum as money, and they also learned to manufacture it cheaply, causing the first “inflation” in America.”
There it was, the truth about inflation: “they also learned to manufacture it cheaply, causing the first “inflation” in America.” Even those who would believe the obfuscation offered by the Fed’s “What is inflation?” display, if they weren’t mindless, would have to pause and consider this statement - particularly in light of what they likely held in their hands.
You see, upon entering the exhibit, every visitor is handed a small bag of shredded federal reserve notes (which, according to the packaging, “represents about $100”).
In its shredded form this “currency” is useless - which means its lack of value is revealed. Federal reserve notes, which gain their usability only through fiat (or decree), lack the hallmarks that emergent money has shown for millennia. A stable currency has these characteristics: it (1) must be relatively imperishable (retain its value over log periods of time - thousands of years - without decay), (2) must be easily divisible without losing value, (3) must be malleable and ductile, able to be shaped into more convenient and portable forms, (4) must remain stable in a wide range of temperatures and climates, (5) has never been worth nothing (has intrinsic value, or rather value as something other than an intermediary of exchange), (6) must be fungible (an ounce from one source would be equal and identical to an ounce from another source), (7) supply is finite without being so rare as to be difficult to use (relative scarcity), (8) new supply is relatively uncommon and difficult to acquire, (9) has a long-standing history of being used as currency, and above all else (10) free people have used it as a medium of exchange or intermediary of trade.
Federal reserve notes, like the wampum those many years ago, is manufactured cheaply and ultimately worthless on its own - triggering the same inflationary consequences.
Peter Schiff on the Debt Ceiling & the Fiscal Cliff:
You don’t ‘pay’ your Visa by putting the balance on your MasterCard. That just transfers your bill from one creditor to another. … By going [further] into debt, America doesn’t pay its bills, [it] avoids paying its bills. …
It’s by raising the debt ceiling that [the federal government] gets off the hook. [It] can avoid paying [its] bills, because instead of paying [its] bills [it] can borrow more money. And what really makes it ridiculous is that [the government’s] not even paying off [its] Mastercard with [its] Visa; [it’s] paying [its] Mastercard with [its] Mastercard. Because… when [the holders of U.S. Treasuries] present those treasuries at maturity to the government to be redeemed, where does the U.S. government get the money to redeem the maturing bonds? From the very people who own those bonds! …
Borrowing money to pay off maturing obligations is the exact definition of a Ponzi scheme. [The federal government] needs to continue to borrow more money so that [it] can pretend to pay back the money that [it has] already borrowed. … Under the guise of ‘paying our bills’, [the president] wants to make sure - [by demanding power to raise the debt limit himself and have only a supermajority in congress be able to veto him] - that we never have to pay our bills. Of course, that’s not the case because eventually the world is going to wake up [and stop lending to the deadbeat borrower]. …
By eliminating [the debt] limit, it gives the [federal reserve] the ability to buy more bonds. And, of course, they’re going to have to because as the [U.S. government’s] creditors realize that there is no limit to [the government’s] debt, they’re not going to want to … roll those bonds over. And so the federal reserve’s going to be forced (if it wants to prevent the U.S. government from defaulting) to monetize that, to buy up all those bonds. And … we replace default with inflation. But from the perspective of [the U.S. government’s] creditors, there’s really no difference. Not getting your money back and getting your money back that doesn’t have any purchasing power or has a lot less purchasing power, are basically distinctions without a difference.
This is amazing.
Watch as prices stay relatively flat with nominal price inflation through the 80’s and early 90’s, then begin a bit brisker rise in the late 90’s that continues to accelerate to a meteoric rise in the mid-aughts… followed by a “pop” that still remains artificially elevated relative to the pre-bubble rise.
As an enabler of inflation, the Fed is ipso facto an enabler of war. Looking back on World War I, Ludwig von Mises wrote in 1919, “One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.”
No government has ever said, “Because we want to go to war, we must abandon central banking,” or “Because we want to go to war, we must abandon inflation and the fiat money system.” Governments always say, “We must abandon the gold standard because we want to go to war.” That alone indicates the restraint that hard money places on governments. Precious metals cannot be created out of thin air, which is why governments chafe at monetary systems based on them.
Governments can raise revenue in three ways. Taxation is the most visible means of doing so, and it eventually meets with popular resistance. They can borrow the money they need, but this borrowing is likewise visible to the public in the form of higher interest rates — as the federal government competes for a limited amount of available credit, credit becomes scarcer for other borrowers.
Creating money out of thin air, the third option, is preferable for governments, since the process by which the political class siphons resources from society via inflation is far less direct and obvious than in the cases of taxation and borrowing. In the old days the kings clipped the coins, kept the shavings, then spent the coins back into circulation with the same nominal value. Once they have it, governments guard this power jealously. …
The war machine and the money machine, in short, are intimately linked. It is vain to denounce the moral grotesqueries of the US empire without at the same time taking aim at the indispensable support that makes it all possible. If we wish to oppose the state and all its manifestations — its imperial adventures, its domestic subsidies, its unstoppable spending and debt accumulation — we must point to their source, the central bank, the mechanism that the state and its kept media and economists will defend to their dying days.
The state has persuaded the people that its own interests are identical with theirs. It seeks to promote their welfare. Its wars are their wars. It is the great benefactor, and the people are to be content in their role as its contented subjects.
Ours is a different view. The state’s relationship to the people is not benign, it is not one of magnanimous giver and grateful recipient. It is an exploitative relationship, whereby an array of self-perpetuating fiefdoms that produce nothing live at the expense of the toiling majority. Its wars do not protect the public; they fleece it. Its subsidies do not promote the so-called public good; they undermine it. Why should we expect its production of money to be an exception to this general pattern?
Price inflation is not an unintended consequence or regrettable side-effect of QE3, it is the goal.
“Since this crisis started, Bernanke … has created more than twice as much new money as all previous Fed chairs combined, just in the last four years.” - Bob Murphy on QE3
Turns out central banking is indeed a tool of the Dark Side.
On paper, the Fed has a dual mandate to push maximum employment and stable prices, but this is only the intellectual gloss. In reality, the Fed has dual clients: the banking/financial sector and the government. His policies are good for both, for now. They are not good for the rest of us. …
Loose monetary policy is the bloodletting of the 21st century, a policy that persists simply because so many people are intellectually invested in it and are unwilling to face the evidence of the failure of their own theory.
QE3 reverses none of what ails the economy. It doesn’t reduce hiring costs. It doesn’t contribute to liquidating bad investments and inspiring the development of solid new ones. It doesn’t reward the sacrifice of current consumption for future investment that is necessary for the building of future prosperity. All is does it drain economic energy. It only means more bleeding of the patient.
So let’s look at the actual effects of this policy:
1. QE3 kills the traditional institution of saving for a generation. It used to be that responsible people would save money, putting it in banks to earn interest. The interest earned was the reward for forestalling current consumption. It’s the parable of the talents all over again. Not everyone wants to be an investor. But everyone can put money in the bank.
What can we do now? You feel like a chump when you look at your bank statement. But don’t blame the banks. Blame the central banks. Bernanke is the one controlling this system, driving interest rates to zero precisely to punish your saving and cause you to splurge in the hopes that this will somehow fire up economic growth.
Remember how George Bush urged Americans to go out and spend money after Sept. 11? This, he said, was the best way for average Americans to show the terrorists a thing or two. All these years later, this anti-saving mentality has been the prevailing ideology. The results have been an abysmal failure.
2. QE3 will drive money to financial innovations that make money for insiders, but are forbidding to the rest of the public. New money has to go somewhere. It typically chases the most-fashionable investments, and traditional saving or dividends are certainly not fashionable. What is fashionable is high-speed programmed trading managed by large institutions.
Does no one remember that this is how the housing boom was created in the first place? Institutions bundled mortgages into marketable packages that glossed over critical questions of risk. It was as if risk didn’t exist. Everyone figured that the federal government would come to the rescue should anything happen. Mostly people assumed that nothing would happen.
Then the whole system blew up. Regrets were all around. For a while. Then the elites must have decided that the whole system wasn’t so bad after all, so they attempted to patch it up. QE3 represents an attempt to re-create the bubble economy in the financial sector. Rinse, repeat.
3. QE3 will keep borrowing costs of the federal government at artificially low levels. Ever wonder why Congress and the president act as if economic law doesn’t exist? They used to worry about the cost of borrowing. But now that is driven to zero. The Fed has provided mad-spending politicians the greatest subsidy they’ve ever had. They can run deficits and debts as high as Mars and not worry about the results. QE3 rewards this outlook yet again.
So don’t look for austerity here anytime soon. The chains have been loosed. They will continue their spending rampage. And the longer it continues, the higher the stakes. Interest rates must remain low forever, for even the slightest uptick will blow budget projections to smithereens. This is how the Fed gets the rest of the government invested in its moral corruptions.
4. QE3 will do nothing to reduce unemployment for those who are most affected by it. The new money will cause boomlets and some hiring, but not among the young, who are now at the point of despair. I just took what must have been my 20th phone call from a smart 20-something who is out of work, living at home, despairing for his future prospects, lost and confused, and thinking terrible thoughts. He wanted to know whether Bernanke’s action will help him. Tragically, the answer is no.
5. QE3 will bring inflation. Maybe it will bring hyperinflation. But that only happens if the banks start using their phonied-up balance sheets as the basis for new money expansion. But why would they do this? It is not in their interest so long as the payout rate is near zero. Another scenario that leads to hyperinflation is the global dumping of the dollar and its dethronement from its status as the world reserve currency.
Barring those scenarios, inflation is likely to take different forms. We’ve already seen this in commodities, health care, energy, and education. But what we don’t see is the glorious deflation that would be affecting all these sectors if market forces prevailed — deflation such as we’ve seen in technology that has been such a gift to humanity. It is the absence of a rise in the purchasing power of the dollar that is the real price we will pay.
Or maybe the laws of economics will be repealed by someone. Maybe alchemy will work this time. Maybe something that has never worked in all of human history will suddenly and inexplicably start to work. That’s seems to be what the Bernanke partisans are hoping for. …