The true significance of the $1 trillion coin

dollar sign sinking in sea

Image by Stuart Miles

Under President Obama the debt of the United States government has grown by about 50%, and now stands at close to $16 trillion. Every year, the US government spends between $1.2 and $1.5 trillion more than it takes in. Every day that financial markets are open the US government has to borrow an additional $4 billion.

The pathetic fiscal cliff ‘compromise’ of last week has proved the most cynical students of the political elite correct in that there is not a snowball’s chance in hell that Washington will ever get this under control.

Can this go on forever? No, it cannot — although adherents of the Church of Modern Monetary Theory now proclaim that its holiness, the State, is not restricted by earthly matters, and that no limits apply to it. “It simply prints the money!” Back on earth, however, such recklessness has consequences, and these consequences will ultimately put a very nasty end to proceedings. But politics will not fix this. This much is certain.

Political theatre

 One of the annoying little things that stand in the way of more debt is the dreaded debt ceiling debate, a quaint congressional tradition according to which the politicians in Washington have to periodically pretend that they can indeed exercise self-constraint and that they would even obey self-imposed limits. After the usual self-serving theatrics, both parties agree that the debt ceiling should be lifted, that spending must continue, and that more debt should be accumulated – in the interest of the American people, the US and the global economy, social peace, and because the show must go on.

Since March 1962, the debt ceiling has been raised 74 times.

Enter The Coin!

In order to make this farce a tad easier next time, the following plan has been concocted. It has recently made the headlines. You can read about it here and here:

The U.S. treasury is to issue a platinum coin with a notional value (that is, a value that is fixed entirely arbitrarily by the government) of $1 trillion, and this coin is deposited with the Federal Reserve. In fact, the coin is used to pay down $1 trillion of US government bonds held presently by the Fed (The Fed holds more than $2 trillion in government bonds). Thus, tradable government debt that counts against the debt ceiling is swapped for a ‘commemorative’ coin that does not count against the debt ceiling. $1 trillion of government debt thus magically disappears.

The US government has its fans who believe that anything, legally or illegally, should be done to keep it living beyond its means for as long as possible. These fans are supporting the plan. Among them is, not surprisingly, Paul Krugman, who fears nothing more than a congressionally enforced coitus interruptus before the protracted orgy of money-printing and deficit-spending has a chance to climax – as he keeps promising us – in a wonderful return of self-sustaining growth.

But the plan has many critics. Their criticism strikes me, however, as rather naïve and faint, and also missing the true significance of it all.

Weak criticism

The critics make the following points:

1)   This is just a trick and may not be legal.

2)   It eases the pressure on politics to reduce the deficit meaningfully.

3)  This could lead us onto the dangerous road toward debt monetization and could be inflationary.

Let me address each of these points before I come to what I consider the most important aspect of this.

Ad 1): Oh pleeeeze! Is it a trick? Is it a gimmick? Could it be illegal? – Are you stuck in the 1980s? – Of course, it is a trick and probably illegal! But who cares?  Please get real. We have long passed the point at which any of the major governments feel constrained by such things as constitutions, laws, contracts or past promises. We live in a time of ‘anything goes’. Remember: “We will do whatever it takes!”

Look at Europe: From the start of the European debt crisis to today, EVERY rule that was set up at the start of EMU in order to govern it and to discipline its members, has been violated, ignored or shamelessly re-interpreted. The political class is making up its own rules as it goes along. Parliaments are rubber-stamping everything, and if they hesitate they are told that they could be held responsible for the ‘next Lehman’. Sign here, or else….

As I explained here, the US government has already abandoned habeas corpus, has arbitrarily annulled private contracts and will force Americans into commercial transactions. You think they will stop at the laws governing the issuance of commemorative coins? Do you really think that the army of lawyers that works for Washington cannot come up with a reasonably acceptable explanation (read: this side of totally laughable) for whatever the government wants to do that will sufficiently appease the folks at Harvard Law Review?

We may not get this specific version of the plan but something similar will certainly be implemented in the near future. You can bet on it. It is simply in line with current modes of thinking and the present political culture – or lack thereof.

Ad 2) The politicians will feel less pressure to enact real budget reform. – Oh come off it! There is neither real desire nor ability nor the required character and decency among the political elite to fix this self-inflicted budget mess. If you needed a reminder of the spinelessness and stupidity ruling Washington you only have to look at the great fiscal cliff compromise that was reached last week and that the equity market, evidently still on a drug-high from snorting unlimited lines of free central bank money, has been celebrating deliriously ever since. Let me say this in reference to a great quote by the incomparable P.J. O’Rourke: To expect Washington to reform itself and rein in spending is akin to giving your car keys, your credit card and a bottle of Jack Daniels to your 17-year old son and expect him to act responsibly.

Ad 3) Could this be the start of debt monetization?

Well, duh.

Debt monetization has been going on for years, is alive and kicking, and gets bigger by the day. In the US and Britain, the central banks are the largest holders of their respective governments’ debt and the largest marginal buyers. The Bank of England has monetized about 30 percent of outstanding debt and now has more UK Gilts (government bonds) on its balance sheet than the entire UK pension and insurance industry combined. Under its current program of ‘open-ended’ QE3 (or QE4, or QEwhatever) the Fed buys $85 billion worth of new Treasuries and other securities every month.

Let’s get this straight: The whole raison d’etre of central banks is that they print money to fund the state. The Bank of England – the mother of all central banks – was set up specifically for this purpose in 1694. Since then a whole list of elaborate excuses has been drawn up for why central banks are needed and useful, a list that looks more ridiculous by the day: Central banks control inflation and guarantee monetary and economic stability? The exact opposite is true: Central banks create inflation and cause monetary and economic instability. There is no escaping the conclusion that they are organs of state planning and systematic market manipulation and thus fundamentally incompatible with the free market. But one true purpose remains: funding government. Increasingly, it is the dominant function of the ECB, the Bank of Japan, the Bank of England, and the US Federal Reserve to secure cheap credit for their respective governments and their out-of-control spending programs.

There is nothing new, surprising, or shocking about the $1 trillion coin proposal. It is perfectly in tune with the zeitgeist and with established trends in politics.

Bernanke will need a new script

So, what is significant about it? – Only one thing in my view: It exposes Bernanke as a liar.

Remember that Bernanke, and also his other central bank chums, such as Mervyn King and Mario Draghi, have tried to maintain the myth that they could one day – if markets allowed it or required it – reduce their bloated balance sheets. During the financial crisis, the Fed has ballooned its balance sheet from $800 billion to close to $3 trillion. We are supposed to believe that this is all temporary. Just to provide a stimulus. Nobody calls this debt monetization or ‘funding the government’. Same in Europe: Mervyn calls it ‘unlocking the credit markets’, Mario calls it ‘making sure the monetary transmission mechanism works’. The idea is that when the economy is finally mended the central banks can ‘normalize’ their balance sheets. More importantly, should inflation concerns arise, the central banks would quickly mop up all the excess bank reserves that they provided through ‘quantitative easing’ and sell the very assets they accumulated during the easing cycle. That would mean liquidating the central bank’s holdings of – among other things – government bonds.

But once the government has replaced liquid government bonds on the central bank’s balance sheet with illiquid coins the central bank’s maneuverability is severely restricted. When the public gets nervous about inflation, the central bank would have to reverse its crisis-policies and sell assets. There is (still) a market for US Treasury debt. However, there is no market for $1 trillion coins.

While the central bankers try to convince the public that their buying of government debt is a special case, an exception, a temporary policy measure, and that they could still defend the value of paper money if circumstances require, the politicians have other plans. They already consider central bank buying a permanent source of funding – unlimited and ever-lasting. I have long maintained that the central banks have no ‘exit strategy’, that they will simply not be allowed to reverse course. This is now becoming part of the official narrative, and central bankers who maintain otherwise are either hopelessly deluded or simply lying.

The deficits are here to stay and they will be funded by the printing press. No limit, no end, no exit.

Will this lead to inflation? _ Well, unless you are a fully signed-up member of the Church of Modern Monetary Theory, you know the answer.

This will end badly.


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Incredible confusions Part 1: ‘Positive Money’ and the fallacy of the need for a state money producer
It’s a mad mad mad mad world


  1. Jim F says

    Gary North has written numerous articles commenting that the Federal Reserve is essentially the head of a banking cartel, whose primary interest is the welfare of its biggest members, and which has not (yet) been nationalized by the Treasury, though one day it may be.

    Surely the people at the Fed must realize the insanity of accepting a single coin in return for $1 trillion of marketable debt? They will never see this money again.

    For sure, any crazy thing can happen now. Great article, thanks.

  2. Lars says

    Great article! I would recommend, rather than a coin, the chocolate “$100,000 bar” (now called 100 Grand bar) produced by Nestle. Tastes great. You would only need 10,000,000 of these to equal $1 Trillion. A more efficient method is to simply change the wrapper to a new name: “$1 Trillion” bar. Eventually, the Fed could sell it back to the investment community and someone could enjoy the treat, assuming its freshness had not yet expired.

  3. Rune K. Svendsen says

    Am I missing something here or is this huge? Isn’t this the transition from the government borrowing money to the government actually printing the money itself? Before it was issuing bonds, debt, which isn’t money. Now it wants to issue actually currency; a coin worth 1 trillion dollars.

    Of course, it’s still on deposit with the Federal Reserve, so it’s base money, and not broad money. But if Japan continues to be a role model for Western governments, the independence of the central bank will soon be gone, and it will be a de-facto printing of money by the government (since the government can just instruct the Fed to sell the coin into the market, or produce some lower denomination coins that the market will accept).

  4. Justin Stares says

    Hi Detlev,
    Whereas money printing doesn’t seem to have had any positive impact on the economies of Europe and Japan, the US is reporting growth of around 3%. Do you have an explanation for this? Best regards Justin

    • says

      Well, are you implying the US economy grew by 3 percent (probably closer to 2.5% but let’s not split hairs) because of easy money from the Fed? But what about the deficit spending by the government? Did that also have a positive effect? And what about the elements of the free market that are still at work in America? Did they contribute to the 3 percent? Things like investment, innovation, entrepreneurship. I would say they certainly did. But how can we add it all up and ‘explain’ 3 percent? — If we had a completely free market – laissez faire, no government intervention – which we evidently don’t have, then it would be clear that the 3 percent was entirely the result of free and voluntary interaction of the trading public, and as an economist I could tell you that there was no reason why these 3 percent could not continue forever, why they would not be sustainable. In fact, all free economies should exhibit positive growth on trend, and probably more than 3 percent. As an economist I am ususally not surprised by positive growth. But today, we live in a different world, a mixed economy in which we have ongoing policy intervention and also still elements of free market capitalism. To analyze and evaluate the full range of effects from policy intervention we have to look at theory (looking at GDP statistics can logically never give you the answer), because only in theory can we isolate these factors and look at them on a conceptual level. This is what I did in Paper Money Collapse, and the conclusions are clear: ‘easy money’ can lift short term growth (and may indeed have done so in 2012, who knows) but it always does so by distorting relative prices and the allocation of capital, and these dislocations will cause recessions later. This is the opposite of sustainable. A lasting contribution to sustainable growth from easy money is impossible. Your observation of a 3 percent GDP-number in the US in 2012 does as little to refute that conclusion as my observation of a balloon outside my office would refute the laws of gravity. — And one more point, if you wanted to be generous and – of course, entirely arbitrarily – credit all the growth to ‘stimulus’ then things would still not look good. 3 percent growth means the US economy (which is about $15 trillion in size) created an additional $450 billion in goods and services in 2012. To achieve such growth, the government runs $1,200 billion deficits (minimum) and the Fed (which was rather restrained in 2012) is now set to print another $1,000 billion in new bank reserves over the next 12 months. Sustainable? I don’t think so.

    • Robert says

      “the US is reporting growth of around 3%. Do you have an explanation for this?”
      Every single dollar of deficit spending is counted as a dollar of GDP growth. During the Weimar hyperinflation, prices were more than doubling on a daily basis (restaurant diners learned to pay their bill before eating)- you could say the German GDP was doubling on a daily basis- how do you like that of growth?
      The sickest part of the current debate is the proposition that if we do not expand the debt limit, “the full faith and credit” of the U.S. is called into question: if a housewife ordered a pound of meat at the butcher’s only to watch him inject 1/2 lb. of meat with water and then hand it to her, she might stand a chance of getting off with a plea of justifiable homicide.

  5. greg butcher says

    The saying “You get the Government you deserve” springs to mind.

    Half of the problem is the self-aggrandising, self perpetuating strategies and tactics of the “elites” running Western governments and central banks (“Cantillon effects ad infinitum”).

    But the OTHER half is that the (still enfranchised) middle classes fail to think for themselves; fail to see that the Emperors and their acolytes have no clothes; and do absolutely nothing to address the problems. Instead like sheep, they vote them all back in to await the next rape and pillage.

    • says

      I totally agree with Greg, and I have said for a while that the middle class is the biggest disappointment to me. If you follow the train backwards these are the people that could have influence and could stop idiotic behavior. Their combined wealth and voting power (in the current system) would still go a long way in shaping government, laws, the Fed, etc. But they are completely unwilling to take any one issue and apply a logical thinking process around it with analyzing the pro- and counter-arguments. I meet intelligent people, who tell me to my face that they know that a certain central planning method is best, and they don’t need to know about any counter arguments. Further, they say that they know that they are 100% right, and that they don’t need to read anything else about it!

  6. George Thompson says

    Checking the prices posted just now (1/11/13 about 12:32 PM New York time) by my favorite coin dealer, platinum is currently trading for $1,626.00 an ounce. That means to make a trillion dollar platinum coin would require, if I did the math correctly, approximately 17,471.77 long tons of the metal. This brings to mind the Yap Islanders’ use of their ‘Rai’– large doughnut-shaped, carved disks of (usually) calcite, up to 4 m (12 ft) in diameter. Somehow, it seems the more we ‘progress’, the more we wind up back at square one.

  7. Kevin M says

    Actually I am glad that this idiotic idea of the trillion dollar coin has gained some currency, so to speak. It shows those who didn’t know before what a joke our monetary and federal budget systems have become. My daughter asked about it and after I explained it, commented that she wishes she could mint a coin to pay off her student debt. Exactly. But the Fed doesn’t take kindly to those trying to muscle in on its counterfeiting racket. May the scales likewise fall from everyone’s eyes following this story.

  8. David Goldstone says

    As you rightly say, there is no exit strategy. Thus for all practical purposes the federal debt held by the Fed does not exist. The interest paid by the Treasury to the Fed is rebated back to the Treasury at the end of the year. And when the principal matures it is just rolled over. It is if my bank allowed me to increase my overdraft as much as I wanted without ever requiring me to pay any interest or ever paying it back. Hence the whole 1T coin debate is meaningless. It entails the discharge of a non-existent liability (treasury debt held by the Fed) for a non-existent asset (a small metal disc). To dignify it as an accounting trick is to do a disservice to accountants.

  9. Giovanni Ricci Armani says

    Great article, it would deserve 1 million readers. But how many will read your columns after they have lost their jobs?

  10. Jahfre Fire Eater says

    Why bother with the coin? All they really have to do is declare an additional $Trillion debt limit and start spending. Minting a coin is a ruse and an added expense intended to create credibility for the hocus pocus.

  11. Steven says

    The idea of using trillion dollar platinum coins to solve the debt crisis is often misunderstood.

    First of all it has absolutely nothing to do with the market price of platinum.

    Secondly as I understand it the mint may not make general circulation coins out of gold or silver but they may do it with platinum.

    Thirdly the government just has to buy 20 to 200 ounces of platinum and make one ounce platinum coins with a trillion dollar face value each.
    As legal tender coins they could pay off the 16 trillion dollar plus direct treasury debt and put the balance on deposit to cover unfunded liabilities. This course of action would also have to coinside with a no deficit and debt policy that is strictly adhered to with deadly penalties for violations.

    Since the current money supply is based on debt and not metal the current money supple is infact worth nothing any way so creating the coins and killing the national debt and backing the unfunded liabilities is actually an improvement over the current situation. The only losers are the recipients of interest payments on government securities and that means they will have to take their chances in the private sector debt market.

    • says

      I think you are very confused here, Steven. There are only two ways of dealing with the national debt, or any debt for that matter: 1) repay it in full, meaning repay it with something that is worth the full notional amount of the debt at time of borrowing, 2) do not repay it in full, i.e. default on it. There is no third way, no magical wand by which you can make the debt ‘disappear’. As to 1), the only way this can be achieved is if the government uses its privilege of taxation and confiscates the income of market-income-earners and/or the property of private property owners, and uses the revenue thus generated to service the debt. This is what the buyers of the debt have contracted for, because only via this process do they get repaid in full with REAL, valuable stuff, namely the (real) resources that have been taken from the private sector and reallocated to the state’s lenders. The state may help itself meeting its (real) obligations to its bondholders buy simultaneously defaulting on promises it made to other constituencies, for example by not meeting its notional obligations to pensioners, welfare recipients, state employees, and so forth (entitlement euthanasia), and thus enable itself to allocate more resources to its lenders. Once the debt load has reached a certain size, the practical and political problems with repaying in full are evident. That’s why option 2) becomes attractive. Defaulting on the debt can be done in two ways: Either the state declares that it will not repay in full and thus openly defaults on the debt. This may not be nice but at least it is honest. It is also the form of default with the smallest negative implications for the broader economy. The other way is to print money and thus not repay the bondholders with something of the value that they originally contracted for, but with something of a lesser value. Bringing more money – and much more money – into circulation in order to meet NOTIONAL loan obligations and without adding to the number of goods and services that are available for purchase with this money obviously entails a loss in the purchasing power of the money. This is inflation. Every plan – and this applies without exception – that promises to cancel the debt, get rid of the debt, annul the debt, or whatever – without open and outright default must entail monetary debasement and inflation. You can see this with the $1-trillion-coin-plan: It only works with Treasury debt that is on the Fed’s balance sheet. To “wipe out” all the debt, the Fed would have to first buy the roughly $14 trillion of government debt it doesn’t already own. How does it pay for it? Well, the same way it paid for the first $2 trillion: print bank reserves and give them to the banks. Remember, the Fed has a balance sheet (interestingly, most proponents of these plans seem to not understand double-entry bookkeeping!) and it has to make an offsetting book entry for the new Treasury debt it holds on the asset side of its balance sheet. Also, it has to PAY for that debt. Of course, once the entire debt sits on the Fed’s balance sheet on the asset side, the government may swap it for platinum coins on which it printed “notional value $1 trillion” (or, for that matter, old Diet Coke cans on which it printed “notional amount $1 trillion dollars”) and you may consider the debt gone. But now the Fed has a balance sheet of $17-odd trillion – larger than US GDP – and the banks have an extra $14 trillion of excess bank reserves ready to be lent. (The banks are now over-reserved because I doubt that all demand deposits in the US are anyway near $14 trillion in aggregate.) That is close to 100-percent of GDP in ADDITIONAL lending power. The debt has been monetized. The debt has been turned into new paper money or electronic money. How will the market respond to this? Will it affect confidence in paper money? Will it affect inflation expectations? Will it affect the velocity of money and measured inflation? — There is no theoretical limit to the paper money the state can print and thus no theoretical limit to the number of hare-brained plans that can be concocted. The practical limit is always the same: the response of the public. If confidence goes, so does the value of the paper money.

  12. tony xaviel says

    Andrew Dixon White detailed what is happening in ” Fiat money inflation in France” The collapse of a fiat system. One must remember the Federal Reserve is no more Federal than Federal Express.It was created by BANKSTERS to loot the country, destroy the Republic,and bring about chaoes as dreampt of by Marx. There is an episode of the Simpsons where Castro has a US trillion dollar bill.It was a joke of course.Imagine the economy is a nuclear power plant.Homer Simpson is @ the controls.Now you have it, melt down ahead………….

  13. paul eisenhut says

    detlev, if central banks purpose is the funding of government..
    why do they do it..? are they all their governments..
    or is is the power to access tax payers money to pay for interest on
    gov debt.? ( whitout having to ask or discuss in parliament )

    • says

      Their own – deeply misconceived – ideas about monetary theory and the possibilities and purposes of monetary policy condemn the central banks to be government financiers – without limit. Modern central banking orthodoxy maintains – erroneously – that, firstly, monetary stimulus is a free lunch that can be provided without any lasting damage to the economy, and secondly, that it is the goal of the central banks to guarantee ‘financial stability’ by backstopping the banks and keeping interest rates (including those on the debt of irresponsible governments) low. This encourages financial recklessness and causes financial instability (reckless bank leverage and persistent budget deficits), and when the inevitable results of this anti-market, anti-prudence policy framework become apparent and manifest themselves in a proper crisis, the central banks have to support the banks and the governments even more to guarantee, er, ‘stability’. The central banks control the printing press, and their policy objects are the following: no bank can be allowed to fail, ‘aggregate’ credit cannot be allowed to contract, government yields cannot be allowed to rise. Consequently, they cannot only not stop printing money, they have to print money ever faster to outrun the system’s growing desire to purge itself.

  14. cadmar larson says

    Have you read Roger Bootle’s 1996 book, “The Death of Inflation”? He explains the causes of unions and corporations can increase prices (asset increases) since WW II. Once this fell apart, this rise in prices will start to fall. Hence, this is where we are at now: a transition from the old mechanism of price increase to one caused by the central banks. The central banks are not as powerful as the unions and corporations in raising prices. All the players now are caught in this transactions and are hoping that the country can outgrow this debt or a take over of China. I don’t think this will work and probably why they are forced even to openly consider a 1 trillion dollar coin!

    • says

      I have not read the book and frankly I do not intend to. I read a lot (and I don’t just read stuff that I expect to agree with – far from it) but from Roger Bootle’s publications in the Daily Telegraph, where he has had a weekly column for quite some time, he does not strike me as a sound thinker on economics nor as someone whose erroneous logic at least offers something new, and may thus be instructive. His errors seem to be of the very conventional standard Keynesian type that is so widespread among British commentators. Of course, this does not stop him from being a popular columnist. In fact, it may help his popularity. After all, most people read newspaper columns to find confirmation of their preconceived notions. (As an aside, to announce the death of inflation in 1996 already strikes me as somewhat silly. I moved to this country in 1996 and I can assure you that inflation has been and still is alive and kicking – and this is not just my personal impression but confirmed clearly by government statistics.)
      The causes of inflation are always monetary. Inflation is -always and everywhere – a monetary phenomenon. It is never – and never has been – caused my unions. Of course, structural factors, such as the extent of unionization and the power of unions, may affect the transmission mechanism through which monetary expansion affects the structure and level of prices. I agree that with the loss of union-pricing power since the 1980s, the channels through which monetary expansion affects certain prices and distorts relative prices have altered. One result has been, in my view, that the inflation has been felt to a larger degree in the markets for investment goods and long-lasting consumption goods (such as real estate). Every inflation works differently.
      If the idea is – and this seems to be a widespread idea, indeed – that with the unions having lost power and with ‘globalization’ having made goods markets more competitive we can now print more money without risking higher inflation, then this idea is entirely erroneous and has to be rejected entirely. But as I said, I have not read the book, so if this is not what Bootle says, I apologize.
      By the way, the channels through which monetary expansion works are changing again. The central banks are still propping up the markets for equities and bonds but they also fund government spending. This money is channeled into a wide range of markets. The central banks have no chance to exit this policy. This will lead to higher inflation.

  15. Steven says

    The use of trillion dollar coins is the only real way out for governments and it must be done quickly. Government should simply pay cold hard coin to redeem all of its bond debt all in one shot. Once government has no debt then it has no obligations to anyone but the voters and tax payers and that has to be limited to equal to or less than government revenues. The money paid to former bond holders has to go some where and the only place left is the private sector economy. Those that doubt the credibility of such a plan need to learn to look for the goods in every situation.

  16. Japan's folly says

    Japan will fix the ills that plague it’s economy by spending 227B on public works projects – surely this will solve the woes that 0% interest rates have not been able to address for the last twenty some odd years. Politicians in the US just have had a big enough stimulus programme.

  17. eddy6787 says

    first, i’m writing here because it appears that you read and comment on reader questions. thank you.

    second, it appears that the $1T coin idea will die. probably for one of two reasons. (1) it hamstrings the FED (2) Obama can demogogue the Republicans over the issue and force another easy cave-in.

    third, my biggest questions are – given the massive electronic money printing by the FED, how do they hold interest rates (long and short) so darn low? Why does anyone bother to bid at Treasury auctions? from my perspective a bond is clearly a loser’s game – but for others??. is it just to ‘front run’ the FED and make a spread from selling to the FED? How come the velocity of money is so low (record lows!!!). Who is hoarding all that cash? the government spends the cash and it goes into the economy and ultimately ends up in the banks who then park it (permanently) back at the FED? is this why no-one who needs one can get a loan?

    I assume if the money velocity increased inflation would ignite.
    is this what ends all this or is this some perpetual motion machine that runs forever?

    • says

      These are a lot of questions. I neither have the time nor the space in the comments section to answer all of them but I believe I have already answered most of them in my book and in other posts. So please allow a rather short and compressed summary that necessarily glosses over the details: Here are some of the reasons why people buy Treasuries even at current yields. Some may sound facetious but I think they all play a role: Treasuries are considered ‘safe’ and are thus, for many people, preferable to equities and real estate and also to deposits at banks, meaning the alternative investment in many cases is cash rather than any other, usually income-generating asset. Cash, if held in form of a bank deposit, does come with counterparty risk. Of course, you can withdraw the money from the bank, rent a safety box and keep the cash there, in which case you have to pay a fee for the avoidance of counterparty risk (the fee for the safety box). The equivalent of this fee is negative yields in parts of the government bond market. Investors prefer safety to returns, and hold certain government bonds even at negative real or even negative nominal yields. It is a fee for safety. Other reasons why people still hold Treasuries: because they always did (tradition; inertia); because Treasuries did well in the crisis so far and are thus believed to continue to do so; banks, primary dealers and hedge funds buy them on loan from -ultimately – the Fed, which means they ‘earn’ the spread between yields on the Treasuries (which are low) and their funding costs (which are almost non-existent): the difference may not be huge but if you leverage enough….; some investors have to hold ‘safe’ bonds for reasons of balance sheet management, risk management, and because regulators force them to do so (pension funds; insurance companies); many people fear deflation and believe that Treasuries are a good hedge against deflation (they are not); the Fed is committed to backstopping the Treasury market. The appetite for Treasuries will vanish when 1) inflation rises and/or inflation expectations rise; 2) concerns over state solvency materialize; 3) somebody tests the resolve of the Fed to backstop the Treasury market; or some combination of 1), 2) and 3).
      A low velocity of money means the public has still confidence in the fiat money system and are thus happy to keep large parts of their wealth in cash. If faith in the system goes (inflation/solvency issues), velocity will accelerate. Money becomes a hot potato.

  18. cadmar larson says

    I am surprised that you haven’t read Roger Bootle (1996) “The Death of Infltion”, as he basically is in agreement with you. He does not really say that there will be no inflation just that we will be in an anti-inflationary environment. We will be in a transitional stage from one type of economy, (he called it managed inflation from producer power, since WW II), to the current cost and price reductions from technological advances, globalization, and an intense competitive environment. In 1996 he outlined all the financial crisis that came about since 2008. In our current transitional stage, he believes that financial markets, when they forcast the future, always used the past as their future environment (you said that inflation will be 2 – 4% as it was in the past) and will not have taken into account these new structural changes to our economy: debt may not be paid back under the initial purchasing power level; and new debt will be used to grease the economy. He says that the real concern is social unrest from a period of falling prices but with this new structural change in the world’s economy, it will bring major increases in prosperity.
    He continues that governemt’s economical policy always has some form of nominal anchor for economy growth: Gold Standard; then oil to U.S. dollar; and targets (money exchange; national income; inflation, etc.).

    My question to you is: Is our government creating a new anchor or just modifying the old anchor and hoping we will return to the old structured economy by not taking into account the new structural changes in our world economy?

    • says

      No, I do not think the government provides a new anchor to the economy (I am not sure I understand what that means), and I don’t think the government has ever provided an anchor to any economy. The government is a source of instability for the economy.

  19. says

    The numbers involved are meaningless to joe average, which includes me! I recently saw an article where large numbers were related to time in seconds. Therefore one million [seconds] equals approximately 12 days; one billion [seconds] equates to approximately 32 years; one trillion [seconds] is around 32,000 years, longer than civilised mankind, if we can claim to be thus! This puts a true perspective on the size of the debts being discussed.

  20. mava says

    @cadmar larson:

    What is “managed inflation from producer power, since WW II”? This doesn’t even make any sense in English, not that it just doesn’t make any sense in economics.
    Are you referring to cost-push inflation? If yes, then the short answer is there is no such thing. Do you understand what are you trying to refer to? If yes, you need to be just a bit more clear. I see that Detlev is losing his patience, as for me, I just don’t understand what is it you trying to point at.

  21. mava says


    I see. So, for you the main point is that this trillion dollar coin underscores the final answer, – the FED will never take the opposite side. Likely, this answer is not for you, however, only for the audience. I mean, did you ever believe that this is anything but the monetization? From your answer to Cadmar, I can tell that you do understand what the true purpose of the FED was, is and will be. As such you could not ever possibly trust the lies about all the other alleged purposes of the FED.

    Anyway, an interesting sentence you happened to type up, to me was the one about the DEB, the books. This is he sole stick in the eye of the government. Remove it as a complication (not as a theater scene requisite), and the problem is solved (Not the real economic problem of course. Just the problem of having enough money to pay for everything they ever wanted to pay for).

    My own estimate is that there is no question that it will be done, more so, I think this had already been done. I think this had been done for quite a while, which explains certain incongruities that come to mind if one observes the markets these days.

    Care to comment? No?

  22. Lee Waaks says

    Hi Detlev,

    I am enjoying your posts but I have not read your book, so please forgive me if my question is premature:

    The economist Jeffrey Rogers Hummel argues that government default is likely, rather than rampant inflation, because the amount of siegnorage available to the state is no longer what it used to be, due to international currency competition. Can you comment on this view? Thank you.

  23. Daniel Victor says

    Hi,Detlev.I have read your book ‘Paper Money oollapse’.It doesn’t comment on the effect that a collapse of one major currency might have on other currencies.Might it accelerate that collapse,or might it provide sufficient warning to persuade other countries to take preventitive measures ?


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