Thursday, January 10, 2013

It's Only Money

I have a secret for you: U.S. dollars aren't really worth anything.  It's magic.  Economists call it fiat money.

You already knew this.  You don't like thinking about it.  The debt ceiling debate makes you acknowledge our currency has no value.

From via Krugman at NYT

In this Op-Ed in the New York Times,  Edward Kleinbard suggests the Treasury adopt the solution California used when they ran out of money: Issue scrip.  He writes:
To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.
Finally, the scrip would be transferable, allowing financial institutions to buy it at a high percentage of its face value, knowing that the political crisis would almost certainly be resolved before long.
Did you read that carefully?  Kleinbard defines "scrip" as pieces of paper with serial numbers that change hands freely, and do not bear interest.  Guess what: That's fiat money!

[Yes, California issued its own currency in 2011, in theory backed by U.S. currency, which is backed by air...but only in theory.]

So, his great solution is for the U.S. Treasury to issue a parallel fiat money because the existing fiat money is tied up in all the niceties of borrowing limits.  We can't get enough green magic paper, so we issue new blue magic paper.  The blue magic paper has value because we will promise to trade the blue magic paper for green later.

My head hurts, and not just because I'm color blind.

In that context, consider another interesting piece from our last jaunt down this road. Laurence Tribe, writing about our last run-in with the debt ceiling,  (yes, you are shocked that I enjoy reading what he has to say on any topic!) notes that the Supreme Court has only once addressed the question of the public debt clause of the Constitution, in 1935.  When we had a gold standard.

This is weird.

We have a problem.  Kleinbard says it is fantasy to issue the magical $1 trillion coin.  Maybe fantasy, but it sure looks like the law allows it.  I'd love to know if Tribe thinks said law passes constitutional muster.  It seems to me that it solves the problem, so it must be unconstitutional.

But, wait!  Which law?  The one that allows platinum commemorative coins, or the one that authorizes fiat currency?  What's the difference?

 If one magical trillion dollar coin solves the problem, then a trillion magical one dollar coins solve the problem too.

So, is fiat money constitutional?