Sunday, January 20, 2013

Peter Schiff On The Trillion Dollar Coin

The coming and going of the idea of the trillion dollar coin, says Peter Schiff, CEO of Euro Pacific Capital, will one day become just a ‘footnote’ when opposed to the debt crisis we are currently in. The fact that this idea was totally rejected by both the Federal Reserve and the President, however, is a positive sign, showing us that after all it is not irresponsible congressmen and ‘out-of-touch academics’ that run the economic policy of the United States. In fact, Schiff claims, during the past five years, the government has created more than one trillion ‘out of thin air’. The difference is that the platinum coin of a trillion dollars is blatantly dishonest and this is easy for the public to see – this means no one would be expected to take the bait. Americans may be totally willing to be fooled, but they would not accept to fall for such a simple trick.

People have acquired the instinct to judge the value of a coin by its metal content. That’s how we know a quarter is bigger than a dime, says Schiff. Because of that, people have rejected the idea of the platinum coin. Everybody thinks that putting such a high value on such a small piece of metal is an act of deceit and despair. And they are right to think so.

These people, however, do not seem to have a problem with so many pieces of paper being printed. The number of zeros on bills does not impact acceptance. It is generally believed that the value of paper money is not derived from paper but from numbers. Originally, this wasn’t so. When money was first put into use, they were promissory notes intended to pay particular amounts of gold. When the use of paper became typical, hardly anyone cared when they removed the gold backing. Thus, the public would probably have been more tolerant towards the printing of a bill of one trillion dollars, than towards the creation of a trillion dollar coin by the government. However, the Fed could not legally hand over to the government that money, claims the Euro Pacific Capital CEO. It is the government that mints coins, not the Fed. So the government didn’t have to depend on the Fed about creating value ‘out of thin air’. This is the reason why the idea of the platinum coin was so seductive, even though ‘unsellable’.

The same thing is being done by Fed, however. They are using the best computing possible along with sophisticated accounting. The Fed purchases private banks’ government bonds in order to, as Schiff says, ‘expand its balance sheet’. Then in return, the banks get credited by the Fed with out-of-thin-air-created funds. Afterwards, the funds are passed by the banks through loans to the general public. But it must be pointed out that the Fed doesn’t have the resources needed to buy these bonds. A Fed computer ‘creates’ the funds. This is easier than the minting of a trillion dollar coin – after all, in that situation something more is required than just the production of a computer code. Window dressing lacks – this is the only difference.

A similarly meaningless distinction is now being made in regard to the raising of the debt ceiling. In a press conference, the President stated that the reluctance of the Republicans towards raising the debt limit was equal to a person buying and enjoying a meal and then leaving the restaurant without having paid the bill. Obama is arguing that if the person had no cash, the use of a credit card would be more responsible. However, the President does not pay attention to the fact that this person has the intention of paying his credit card bill using another card, later repeating this process until he loses all of his cards. Thus, in the end the issuer of the diner’s last card ‘gets stiffed’, instead of the restaurateur. Schiff defines this as a distinction with no difference, as with the trillion dollar coin.

More than 16 trillion dollars in funded obligations are currently counted by the Federal Government. In 10 years from now, expectations are that we will add about 10 trillion dollars, if not more. A balance in the annual budget is not in the least expected in the near future. All future bills we face will be paid by a massive-scale future borrowing. People who have an ounce of integrity, Schiff says, would have to get prepared for the possibility of a debt rollover that is ever increasing, turning out to be a ‘limited prospect’. This kind of understanding will mean someone is about to ‘get stuck’ with the bill. In the CEO’s opinion, this is just as irresponsible as ditching after dining.

In truth, failing to raise debt ceiling cannot be viewed as a commitment to abandon obligations. This is a decision to put a stop to borrowing. The government is able to meet all the obligations by means of tax raises, spending cuts and entitlement reforms. It chooses, however, not to act on it.

Peter Schiff claims that America is sending a message to its creditors – the US is not willing to repay debts using tax power. It will continue to rely on borrowing more. Thus, it gives us a sign that it refuses to deal with our fiscal problems in a responsible way. Schiff points out that it’s a pity so many people cannot accept these simple facts.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.