Can someone explain how it is that the Bank of England can summon huge amounts of money into existence through QE by just updating entries in some ledgers, but for something like this we need to mint/print some physical object?
Every time I think I understand how modern money works, I learn about something like this.
> for something like this we need to mint/print some physical object?
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 $100 million deposited into its reserve account at the San Francisco Fed and creates a deposit in the recipient's account.
Keeping track of all of the above is complicated. Physical settlement, in a country without the telegraph, reduced the risk of errors. Moving around tonnes of cash is inconvenient. Hence, super-large bills, used solely for the settlement layers above.
Until nixon axed the large bills as part of the drug war. With 1000$ being the new largest bill, gold bars/coins became a potentialy practical option once again. Krugerrands (sp?) tried to capture this market but never caught on.
$100 is the largest federal reserve note today. And even that is under pressure, mostly from the anti physical currency crowd.
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.
I'm fuzzy on the particulars, but I think the big thing's that a trillion-dollar coin is a loophole to bypass Congress, allowed because Congress has already authorized the laws that contain the loophole.
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.
The distinction is that a bond is a piece of paper that can be exchanged for money, but is not legal tender. A 100 million GBP note is literally money and could theoretically be spent at a store. It’s not in circulation and you couldn’t get change for a note that big, but you could theoretically spend it if you got your hands on one.
> A 100 million GBP note is literally money and could theoretically be spent at a store.
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 can always barter/trade goods and services, but you are not required to accept these goods or services as payment. Legal tender means that the government says "this is money" and they guarantee its value and require that it must be accepted to pay off debts. As in, within the USA a restaurant must accept US dollars as payment for a meal, but they are not obligated to accept a barrel of oil (or a bond), not matter how valuable the barrel may be.
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.
> As in, within the USA a restaurant must accept US dollars as payment for a meal, but they are not obligated to accept a barrel of oil (or a bond), not matter how valuable the barrel may be.
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.
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.
If it was 1 million GBP then maaaaaybe you'd be able to spend it somewhere (e.g. a casino might take it from a VIP high roller I guess?) but at 100 million I don't think you'd be able to do anything in practice besides take it back to the government directly.
The trillion-dollar coin is so amusing because it's so blatantly disingenuous. I mean, no one's seriously going to treat the coin as actual money, but rather as a symbolic trinket.
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.
I can't remember where I heard it, but an interviewer asked Obama what his hardest decision was in office and he responded "the trillion dollars coin". In retrospect it seems absolutely massive in terms of setting precedence, but at the time it just seemed like part of the news cycle.
Somewhere in a drawer here I have a Billion dollar note from some African nation from years ago. I think it roughly converts to about $100 here in Australia.
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 [1]. There are some really fun ones in there like the Congolese Franc, etc.
I bought a couple as a gift for my banker brother-in-law and got them framed. The owner of the frame shop was concerned about keeping them in his store, but then I explained that the frame he was making for me was worth more than they were.
The trillion dollar coin idea is a good one, and completely legal, and the idea will come up again if there's ever a Democratic president. And no, it's not inflationary in the slightest (the inflation, if any, would originate with the government spending in the first place, not in how that spending is accounted for behind the scenes).
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.
Money is just a useful abstraction to get economic exchange to happen more easily. So long as the money supply is vaguely in line with the demand for real goods and services the details don’t matter too much.
As long as the government can keep spending more every year, everyone is happy. This will apparently work forever. Best not to ask questions about how this affects the poor that don't have inflation hedges such as real estate or stocks.
The poor can easily get those things as well, especially with apps like robinhood that make buying stocks easier than ever. Also you have cryptocurrencies now that can basically be purchased in seconds.
Just to clarify: by "material basis" I dont mean "intrinisic" but rather "representational" like how when money was first invented, 1 unit of money represented 1 unit of material wealth (i.e. one cow)
An even more interesting idea is treasury bonds with high coupons that would sell for above par, allowing more spending without increasing the debt by the full amount.
All these hacks just illustrate the fact that money is a social construct.
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.
We agree things are value because of the properties they possess. I feel like you are dismissing that. It's not just that we "decide", based on nothing that something has value. Gold is used in electronics and jewelry. It's properties enable it to be used for such things, therefore there is value. Sure, crypto hard forks happen and more value is created. However, it's based on the rules that govern the coins. It's based on the fact that digital "objects" that are governed by these sets of rules. Those are properties. Bitcoin is most definitely hard money and the rules(properties) that govern the chain are deemed most likely to benefit the largest group of people, therefore it's the coin worth the most. Hard money to the max.
> 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.
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.
An interest rate is not only a proxy for credit risk but also is driven by demand and supply.
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".
> "Beowulf" would later tell Wired magazine that the coin idea came from a December 2009 Wall Street Journal article that talked about how several people were able to generate frequent-flyer miles at no cost by ordering coins from the U.S. Mint with a credit card offering mileage rewards and then depositing the coins at a bank to pay off the credit card debt.
Here's my question. As far as the national debit, somewhere on planet earth there are people who are owned this money. They are out there presumably collecting interest.
How does this whole platinum coin exchange change their situation?
It entirely depends on what is done with the coin.
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.
> 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)
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.
While the economics dogma may agree that this is true, I imagine many people have a hard time swallowing the idea of this never-ending of printing free money and giving it to the banks and government.
They do (in some sense) give it to the government, but not to the banks. The banks get it in exchange for bonds and shares which they sell to the Federal Reserve. So the banks aren't getting money for nothing, they're exchanging money-in-the-future for money-now, which is why inflation is created.
If you think about it, when the banks go bust and need a bailout, the Fed debited their balance sheet for 4 trillion dollars but the other side of the balance sheet is buying "toxic assets" or government debt from Wall St banks.
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.
My understanding is that the bailouts were completely separate from the quantitative easing. The money for the bailout was raised by selling government debt, and in exchange for it the government got shares in those banks (the government actually ended up with a profit in the long run). This was all on the government balance sheet.
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.
QE was the bailout, primarily. It is what economists call monetary policy, with the other side of economic policy being called fiscal policy. The fiscal side of the bailout was much smaller, amost by 3 orders of magnitude. Anyways, it's Ok to be new to a subject but you shouldn't state as much in the first sentence and then start pronouncing what look to be conclusions in the second.
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.
Everyone bases all their valuations on something that can be devalued or manipulated at will, and only isn't because "smart" people are in charge.
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.
How is this different from dilution of shares in a company?
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.
It’s exactly the same as dilution on shares except for in this theoretical, you’re talking about 1T in dilution while the asset wealth of the US is something over 270T. So this would effectively be one of the kindest dilutions ever — and even then it didn’t actually come to pass.
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.
Depends on the size of the bank. I know someone who needed to borrow "just" a few million to purchase a warehouse and I think 3 local banks had to pool up the money to lend him and to spread out the risk. Sure for a giant corporate bank that's literally nothing but there are still small banks all over the country which have relatively little capital.
It's only half of the truth. The other half is, the government has to tax you out of your slightly stronger dollar to pay back the loan to the bankers.
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 concept isn't really about how one would use or spend such a coin. In practice, if this were ever to happen, they would be issued to banks who would throw it in a vault somewhere and then use it as a reserve for lending just as they would any other asset.
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.
This article takes me back. I remember being pro-trillion dollar coin, if it came to issuing that or defaulting. Too bad Obama didn't know what Trump does: obeying the law is optional for the president.
>Originally, Homer was to learn that he was a Native American, and would try to exploit it to not have to pay taxes. The idea had been going well for a few days, but the staff did not actually know whether Native Americans had to pay taxes.
I have yet to understand why people are upset about the concept of China devaluing their currency and manipulation of it, and don’t have an issue with the US doing it.
But I believe it's more bizarre that Congress has the power to appropriate funds, but then also has the power to deliberately deny payment. The fact that the debt ceiling exists at all is the bizarre part.
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.
The term “checks and balances” is almost always used wrongly, as in this article. Checks and balances are the ways the different branches of government check each other. The trillion dollar coin was a goofy proposal for the president to save Congress from itself.
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.
I'm not sure I understand this guy's point. That America is evil or hypocritical? Does that add to this discussion about a proposed and rejected solution to the debt ceiling?
Whether or not this person hates America is debatable. Regardless, if we just ignored everyone we disagreed with I don’t think we’d make much progress in general. In fact, ignoring people who disagree with you seems to be a huge problem in the country right now.
Edit: the post I originally replied to said “this person hates America. Ignore.”
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.
At least part of that is because some other currencies have weakened, not simply because the dollar has strengthened. The British pound as an example, especially for something previous considered a stable and relatively "hard" currency, has lost an astonishing amount of value since the Summer of 2016.
> Professor Jonathan H. Adler of the Case Western Reserve University School of Law has said that he believes the legality of the trillion-dollar coin to be dubious.
One of the most harebrained schemes hatched to date, "dubious".
Interesting that the US govt is actually trying to find ways to circumvent the world bank.
I was under the impression that they were in a solid partnership.
Where did you get that? This was an idea that someone posted on on a blog as a hypothetical way to bypass congress’s ridiculous debt ceiling rules which are used to hold the economy hostage during budget negotiations. And it was rejected the agencies that could have implemented it. What does this have to do with the World Bank?
Took me a little extra digging to see that you’re right. Apologies: I sometimes have difficulties where facts get jumbled in my brain as they are being considered.
It was telling me that the world bank is the organization that lends money to the US and controls the currency and the US is therefore beholden to them. The correction is that it’s the federal reserve that lends money to the US and the fed is owned by US banks with no clear, evidence-based, ties to the world bank at all.
[0] https://en.wikipedia.org/wiki/Bank_of_England_%C2%A31,000,00...
[1] https://en.wikipedia.org/wiki/Bank_of_England_%C2%A3100,000,...