Monday, January 21, 2013

Trillion Dollar #DIV/0!

This whole thing about the "trillion dollar coin" brings up an interesting problem. To rehash it, it's that the U.S. Treasury may use an unintended consequence of an obscure earmark amendment to stamp a platinum coin denominated as $1-trillion dollars, and deposit it with the Federal Reserve as collateral for new loans, which the government can then use to pay its bills.  It is an accounting hack, (the programmers equivalent to the side effect of a function) and one that even an eminent NYTimes economist believes should technically work.

This of course begs the question in regard to what one means by "technically" and "work," but hey, he's got a Nobel Prize in Economics so I'm sure he knows what he's talking about. To a point, anyway...

The coin is a tactic to sidestep the bond market and get new money for public bills without being seen to be running up the nation's credit card. Under the Trillion Dollar Coin scheme (and indeed, other similar schemes under the aegis of "quantitative easing") instead of going to public markets to sell bonds, public institutions are in effect selling the bonds to themselves.

The division over whether or not this is a good idea seems to come down to moral arguments over whether there is a separation between the market economy and the public sector economy; whether legally separate government institutions trading debt amongst themselves constitutes "real" economic activity - or whether it is just a manipulation of indicators between government departments by a single command authority (the U.S. Treasury) to "cook the books" as a way to stave off defaults on payments to public stakeholders and real economy bond holders. 

The public sector in any advanced country is a kind of black box command economy, where revenues (or debt) go in, then trickle out as payments according to the agenda of the day. Where they trickle "out" to is the market economy of individuals (as employees and contractors) and firms who exchange goods and services.

For people who think that the Trillion Dollar Coin ("TDC") solution is a viable and legitimate hack, there appears to be little if any duality in their view of the economy. The view supposes the economy is a society with the state at the centre, with all money circulating through it at some point.

Government departments whose business does not interact significantly with the market economy are the same as any large enterprise or conglomerate.  Each has hooks and portals to the market economy in the outside world that pay real money to people for real goods and services. They have budgets that are spent or forfeited, and barring some of the more perverse incentives in the public sector, they are market participants like anyone else. 

Skeptics would point out that the public sector does not function like a market economy. It is a stand-alone and separate enterprise, an encumbrance which is centrally planned and approved, and it does not comprise individuals and firms engaged in price discovery. In this view, the TDC is an abuse of a legal loophole that strenuously construes unintended authority from the letter of an irrelevant  law. Viewed as a separate economic entity, for the government to conjour $1trn into existence is like a company kiting a cheque to itself, hoping that the bank turns a blind eye and increases their overdraft to cover it.  In the case of the TDC, the Chairman of the Federal Reserve is expected to collude in franking that cheque.

The TDC probably won't happen, and it seems like a red herring tactic in the Democrats' debt ceiling negotiations. But in signalling that the U.S. President is not above legalistic shenanigans that threaten to debase the currency, the Democrats may have created a self-fulfilling prophecy.

The real question is, let's say the U.S. Treasury stamped five or six $1trn coins to deposit into different federal reserve banks across the country. If one were to hatch a plot to steal a Trillion Dollar Coin while it were in transit,  in a brilliantly orchestrated and daring heist, how much do you think said caper might net the thief?

He would have to lay low for a while, find a fence with the means and connections to move a $1trn coin, and even then the fence would be taking on huge risk and probably only give the thief cents on the dollar for it. It's still worth the thief's while since a few hundred billion, while relatively paltry,  is better than nothing. Yet still,  the fence would have some difficulty since nobody else would want to take on the risk of having to move it, what with the heat on and there being no guarantee that they, too, could find a buyer and make their own money back.

In banking and the finance press, they call the ability to convert an asset (like a TDC) into another currency "liquidity," as in, "a pickled shark by  Damien Hirst may have been bought for millions of dollars, but nobody else in their right mind would pay anything for it, so it's considered an 'illiquid' asset." If you have ever tried to sell a piano for any more than the cost of haulage, you have an intimate understanding of what illiquidity means. Not to belabour it, but put another way, it doesn't matter what you paid for it,  its "mark to market" price is asymptotic to zero because nobody wants the thing.

Hence, one should reasonably ask - given the U.S. Treasury mints a trillion dollar coin and deposits it in the Federal Reserve Bank, but everybody in the world knows that the Fed won't be able to sell it, and even if it could, the entity that bought it wouldn't be able to move it either - who the fuck will accept payment in anything backed by collateral whose liquidity is guaranteed to be zero? 

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