The Most Embarrassing Financial Column of 2013
We are only two weeks in to 2013 and there is plenty of time for far more embarrassing financial columns to be written, but The Guardian's financial editor, Heidi Moore, has opened up an early lead in the competition. Moore's column represents five embarrassing elements. She entitled her piece: “'Mint the coin': why the platinum coin campaign doesn't even work as satire.”
The first requirement to be a financial reporter is to understand the monetary system and the difference between a sovereign and non-sovereign monetary system. Moore's column demonstrates the multiple levels on which she fails this requisite when she tries to demonstrate that minting a $1 trillion platinum coin would not counter the Republican Party's threat to cause the U.S. default on its obligations and would injure our economy.
Here is one big problem: the US Treasury spends approximately $100bn per month. A trillion-dollar coin would buy the Treasury only about 10 months of breathing room.
Another problem with the trillion-dollar coin is that the US mint probably doesn't have the capacity to create one out of real bullion, which will likely be required for something with such a historical importance. The US mint no longer produces platinum coins, except in collector's editions that retail for $1,892 at the moment. A real platinum coin – the American Eagle – that was produced as recently as 2009 contains 31.12 grams of platinum and has a face value of $100. There is not enough platinum in the US in a year's supply to create that. The US produces all of 3,700 kilograms of platinum a year.
The mint could, on the direction of Treasury, just make a platinum-finished coin that bears the face value of $1tn, but that would just create a nonsensical level of inflation in the value of the US dollar.
Another point, perhaps, is that it's no worse for the Treasury to print a trillion-dollar gold coin than it is for the Federal Reserve to buy trillions in mortgage securities to save banks and the bond market. There is more meat to this – the US government is not nearly done meddling in the world of the economy and the markets, and minting a new coin is very much in the interventionist mold of the past four years. But the Fed's programs don't require scouring the US reserves for platinum and creating some unnatural currency beast. It can at least masquerade as an intellectual exercise.
I will put aside the glitch in fourth paragraph in which her platinum coin transmutes into a gold coin that she thinks the Treasury can “print” and focus on how revealing these paragraphs are about Moore's lack of understanding of the basics of the financial system. Her first argument is that a $1 trillion platinum coin would only delay the Republican Party's ability to use the debt ceiling to extort by about ten months. She bases this claim on how much the federal government “spends” each month.
Embarrassment number 1
Moore thinks the debt ceiling constraint depends on the rate of federal spending. It is a constraint on borrowing, not spending.
Embarrassment number 2
Moore thinks one could only issue a single platinum coin valued at $1 trillion. It isn't any harder to engrave the number 2 or 5 on a coin before the word “trillion.”
Embarrassment number 3
“Another problem with the trillion-dollar coin is that the US mint probably doesn't have the capacity to create one out of real bullion, which will likely be required for something with such a historical importance.”
Moore does not understand how a sovereign currency operates. The U.S. has a sovereign currency. When we issue coins we do not have to worry whether the metal in the coin has a market value at least equal to the value we engrave on the coin. We deliberately use less expensive metals such as copper and zinc to make our coins. It would be foolish to use more expensive metals. The value of our coins has nothing to do with their composition. Everyone knows this, for we also use bills. No one thinks our $20 bills' value depends on them being printed on expensive paper that has an intrinsic value of $20. The $20 bill has a value of $20 because the U.S. declares it is worth $20. The U.S. requires us to pay taxes in dollars.
Moore's assumption that something additional is “required” to make a sovereign coin or currency value demonstrates that she does not understand sovereign currencies. Her assumption that currency has to be backed by “real bullion” when it has “historical importance” is bizarre. She not only thinks the U.S. currency is still based on a precious metal standard, she thinks only precious metal standards are possible. Precious metal standards are virtually non-existent for excellent reasons. Moore has lived her entire adult life under fiat currencies – and she is a finance editor.
Moore's beliefs about sovereign currencies are analogous to believing that the stork brings babies. Governments create money – trillions of dollars of money – every year by making keystrokes on a central bank computer. The money they create is real, and it is used constantly by all of us in transactions without being printed or minted, much less minted from .9995 platinum.
Embarrassment number 3.1
“A real platinum coin – the American Eagle – that was produced as recently as 2009 contains 31.12 grams of platinum and has a face value of $100. There is not enough platinum in the US in a year's supply to create that. The US produces all of 3,700 kilograms of platinum a year.”
These two sentences are an expansion of embarrassment number 3.0. It is hard to believe that a finance editor thinks that a $1 trillion platinum coin's value would have anything to do with the value of the bullion in the coin, but Moore actually thinks her discussion of bullion demonstrates her financial expertise and wit. That makes these sentences worthy of special attention as embarrassment number 3.1. Her discussion is analogous Bishop Ussher's claim that we know that the earth is only 6,000 years old based largely on his detailed mathematical computation of the “begats” listed in Genesis.
An ounce is 28.35 grams, so Moore is describing a roughly one ounce coin of nearly pure platinum with a “face value” of $100. The phrase “face value” should have prompted Moore to understand her error. Platinum's current price is about $1600 per ounce ($25,600 a pound). The calculations I present are based on a platinum price of $1600 per ounce. Even in 2009, when platinum prices were lower (around $1000 per ounce) that means that the American Eagle cost the U.S. vastly more than $100 to produce. The U.S. Mint is not irrational, so the “face value” of the American Eagle has nothing to do with the value of the coin. The Mint sells precious metal coins like the American Eagle based on a mark-up over the current market price of the precious metal in the coin. The Mint chooses the “face value” on the precious metal coins based solely on what its design and marketing people say coin collectors will find most attractive. The “face value” has nothing to do with the coin's value. The American Eagle has nothing to do with normal sovereign currency. It was designed not to circulate, whereas normal sovereign currency is designed to encourage circulation. Normal sovereign currency's value is always the face value.
Does Moore think the proposal is for the U.S. to spend $1 trillion to purchase approximately 39 million pounds of platinum at the current market price? (Actually if we tried to purchase 39 million pounds (about 17.7 million kg) of platinum we would cause the price of platinum to soar and cause terrible shortages of a very valuable metal used in vital industrial applications. World production of platinum in 2010 was 192,000 kg, so we would need to purchase nearly a 92 years' worth of the current entire global production of platinum and cause catastrophic damage to the global economy by taking platinum out of productive uses and consigning it to a massive statue.) Platinum is dense (21.45 g•cm−3), but a 39 million pound platinum coin would be slightly unwieldy and impossible to mint. It would be a hill, which I propose naming Mount Moore. It can serve as the centerpiece of her Fantasy Finance Theme Park.
The obvious question is why the people who developed the $1 trillion platinum coin proposal, financial pros, would think it made any sense for the federal government to spend $1 trillion to purchase most of the world's platinum – and then to make a massive statue of it and call it a “coin.” Remember, the context of the $1 trillion platinum coin proposal was to remove the ability of members of Congress to extort austerity by threatening not to raise the debt ceiling. Paying $1 trillion to purchase platinum so that the federal government could issue a $1 trillion coin would not increase net federal revenues or assets. There is also the question of how the federal government would purchase the $1 trillion in platinum. The federal government can only spend appropriated funds. There are no appropriated funds for purchasing $1 trillion in platinum. There is no chance that Congress would appropriate $1 trillion to fund the purchase of most of the world's platinum. If Moore were correct (she isn't) that purchasing $1 trillion in platinum would allow President Obama to counter the Republicans effort to use the debt ceiling to extort austerity, then the House of Representatives (controlled by the Republicans) would obviously refuse to appropriate $1 trillion to purchase most of the world's supply of platinum. That means that the financial pros who designed the #mintthecoin proposal were incompetent and crafted a plan that could only work if they assumed away the Republicans' control of the House – the source of the extortion problem that the $1 trillion platinum coin was supposed to counter.
There is also an ironic problem with Moore's straw woman $1 trillion precious metal bullion plan. How would the federal government buy the $1 trillion in platinum? It obviously would not be funded by a tax increase, so (under Moore's concept of government finance) it would require the federal government to borrow $1 trillion to fund the purchase of the platinum. The federal government does not have $1 trillion in additional debt authority under the current debt ceiling. Moore's straw woman proposal, therefore, would actually cause the federal government to breach the debt ceiling immediately, giving the House Republicans maximum leverage – when the purpose of the (real) $1 trillion platinum coin plan is to remove the ability to use the debt ceiling as a means of extortion. Moore has devised a straw woman platinum coin plan that lives down to her description – “idiocy.” Her plan bears no resemblance to the actual platinum coin proposal because she has no financially coherent criticism of the actual proposal.
Moore thought she was being funny, showing that the U.S. would have difficulty issuing a pure platinum coin containing platinum with a market value of $1 trillion. Her effort has three problems. First, the $1 trillion coin strategy was always for a platinum-clad coin with trivial platinum content. Second, the people who developed the strategy understood financial operations, sovereign currencies, and platinum. They knew far better than Moore that a platinum bullion coin would make no sense and they never considered proposing such a coin. Her efforts to ridicule people who actually have financial expertise proved impossible because they had thought through the issues. Moore, therefore, had to resort to creating a straw woman proposal that she could ridicule. That reflects poorly on her. Third, because Moore does not understand financial operations, sovereign currencies, or platinum she didn't even make the obvious points set forth above that show how absurd a “coin” (aka a hill) composed of $1 trillion in platinum would be. So, even as satire, she failed because she didn't understand the world of finance.
Moore knows that the #mintthecoin proposal is to mint a $1 trillion platinum-clad coin with a trivial platinum content. Gold-clad coins, for example, are often sold with a total gold content of 14 mg (.014 grams). Platinum costs about $56 per gram, so the cost of the platinum required to clad the $1 trillion coin is about 80 cents.
Moore created a straw woman proposal to try to make the idea of minting a $1 trillion platinum-clad coin seem impossible to implement, but ended up further embarrassing herself.
Embarrassment number 4
Give an austerian a column inch or three and hyper-inflation is sure to emerge.
“The mint could, on the direction of Treasury, just make a platinum-finished coin that bears the face value of $1tn, but that would just create a nonsensical level of inflation in the value of the US dollar.”
The first part of her sentence reveals that she knew the #mintthecoin proposal was never to create a precious metal bullion coin. The second part of the sentence demonstrates additional areas in which Moore does not understand the fundamentals of the financial system. Minting a $1 trillion platinum-clad coin would have zero effect on inflation. Moore, however, without any explanation or citation, claims it would produce not simply inflation, but “a nonsensical level of inflation” – hyper-inflation. It is difficult to respond to Moore's non sequitur about hyper-inflation because there is no logic to respond to. She does not understand the financial system, fiscal policy, or hyper-inflation. She also is not logically consistent. Here is how she describes the #mintthecoin proposal.
“Their reasoning is this: the US Treasury has the power to create platinum coins of any size and denomination. It could easily print one with a face value of $1tn and deposit it at the Federal Reserve, thus immediately adding $1tn to the Treasury's bank account and giving it breathing room to avoid the debt ceiling fight.”
Note Moore's logical inconsistency – she admits that the proposal is not to create a bullion coin. Her straw woman argument about a bullion coin was not an innocent error but a deliberate attempt to mislead her readers. But the error I wish to emphasize is hyper-inflation, and this paragraph by Moore helps show why minting the coin has no effect on inflation. The plan is to “deposit [the coin] at the Federal Reserve.” That action cannot cause any inflation. Remember the context – the debt ceiling. We are not talking about a plan to increase spending or the money supply. The effect of the plan would simply be allowing the federal government to spend money already appropriated by Congress. The plan is not designed to have any effect on the money supply.
The next question is whether Moore believes that spending pursuant to existing appropriations would cause hyper-inflation. There is a straight-forward answer to that question: no. Inflation is trivial, and the long-term bond markets for U.S. bonds show that the markets anticipate exceptionally low inflation over the next two decades.
As I have explained in an earlier article, Moore is a proponent of austerity despite witnessing austerity throwing the Eurozone into recession (and Spain, Italy, and Greece into Great Depression levels of unemployment) while modest stimulus in the U.S. produced modest growth. She put in print the single most basic falsehood about austerity – the claim that a nation with a sovereign currency is just like a household and must balance its budget through austerity in response to a recession.
Moore may wish to claim that U.S. spending in accordance with existing appropriations will cause hyper-inflation and that the only means to prevent that is to encourage the House Republicans to use the leverage of the debt ceiling to extort the Obama administration into agreeing to inflict austerity on our Nation. If she makes that argument we will respond to it.
Embarrassment number Five
“[T]he US government is not nearly done meddling in the world of the economy and the markets, and minting a new coin is very much in the interventionist mold of the past four years. But the Fed's programs don't require scouring the US reserves for platinum and creating some unnatural currency beast. It can at least masquerade as an intellectual exercise.”
The Guardian's financial editor sounds just like the Tea Party. The monetary system is a governmental system. Central banks decide how fast the money supply will grow, what interest rates will be, which banks they will lend to, and in conjunction with their national Treasury, which banks' creditors will get bailed out. Moore describes the normal functioning of central banking as “meddling” and implies that it is illegitimate. The “interventionist mold” of the Fed did save the bacon of the private banks and markets. It is good to recall that the Fed's intervention occurred largely because thousands of markets were ceasing to function as private bankers came to distrust other bankers' asset valuations due to widespread, massive inflation of asset values by most of the world's largest banks.
Moore's inability to make any financially coherent criticism of the real platinum-clad coin proposal leads her to rely instead on ad hominem invective and a return to her straw woman pure platinum bullion $1 trillion coin proposal. The second sentence in the paragraph I quote above exemplifies both weaknesses. She begins with the straw woman claim that the platinum coin would require the “scouring of US reserves for platinum.” Scouring the U.S. reserves for 14 one-thousandths of a gram of platinum – 80 cents worth of platinum. How herculean!
Then comes the ad hominem – if one can use that term to refer to an insult to a coin instead of person. The coin would be an “unnatural currency beast.” Oh dread! Maybe we should mint three of them, each with the face value of “666” billion so that Moore can call it demonic and cite Revelations to prove that it is a sign of end times. Why are electronic bits (the form in which trillions of dollars in money is created, exists, and is exchanged) “natural” to Moore while a coin is not only “unnatural” but the sign of the “beast?”
Moore ends with this ad hominem criticism of those who developed the #mintthecoin proposal. She has complete disdain for the Fed's “meddling” in the economy, but she says that the Fed's actions at least represented “an intellectual exercise.” The intended implication is that the proponents of #mintthecoin failed to mount even a flawed “intellectual exercise.”
Moore was on Up with Chris Hayes on January 12, 2013 to discuss the platinum coin proposal.
Two of her fellow guests supported the plan, including my UMKC economics colleague, Stephanie Kelton. Moore was unable to mount any substantive criticism of the real proposal. Given the presence of financial experts who could expose her if she advanced her straw woman claim; Moore could not claim that the coin would have to contain $1 trillion in platinum. Chris Hayes explicitly dismissed the canard that the coin would be composed of $1 trillion in platinum as silly in his introduction to the topic. Moore's one-word reaction to the actual proposal was that it was “chilling.” Moore simply called the proposal “ridiculous” and made the false claim that Congress could not legally fail to increase the debt limit. She later clarified this statement to be that Congress could not constitutionally fail to increase the debt ceiling. She presumably means the 14th amendment, but that does not provide any useful remedy unless the Obama administration is willing to invoke the amendment and declare that the federal government will pay its debts. The platinum-clad coin proposal would provide the administration with the ability to make such a declaration real, so under Moore's logic she should be a strong proponent of #mintthecoin.
Moore's final claim was that the proposal would destroy the credibility of our currency if we failed to pay our debts. But that reverses the reality. It is the Republicans who are seeking to extort austerity by refusing to extend the debt limit and forcing the U.S. to default. The platinum-clad coin is all about making sure that no one can force us to fail to pay our debts. Moore's concern about a loss of “credibility” because we “fail to pay our debts” should lead her to support the platinum-clad coin proposal.
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.
Follow him on Twitter: @WilliamKBlack