LONDON (Reuters Breakingviews) - Platinum, like other precious metals, is sometimes considered a reliable store of value. U.S. lawmaker Rashida Tlaib wants to use the material in a new way, one which would help the coronavirus-damaged economy now – but potentially destroy some value later. The Democratic congresswoman from Michigan wants the American government to mint two platinum coins, each with a face value of $1 trillion.
Tlaib has been hanging around with some suddenly much more popular economists, the promoters of Modern Monetary Theory, widely known by its acronym. The theory’s most visible exponent is Stephanie Kelton. The title of the Stony Brook University professor’s forthcoming book, “The Deficit Myth”, discloses the key idea: the traditional idea that governments should aim for balanced budgets is really wrong.
MMT’s underlying logic starts with the observation that the best way to make the economy run at full speed is to put money in the bank accounts of people or organisations that will spend it well. Proponents of the theory, including presidential contender Bernie Sanders, tend to think that governments are generally the best spenders, but that is more politics than economics.
The next step in the argument is more controversial. MMT says that governments do not need to borrow money. They can create as much of the stuff as the economy can make good use of. It’s simple. Pushing a button on the master money-computer will add to the balances of any and all bank accounts.
The idea used to send shivers down economists’ spines. They thought it was a recipe for inflation, and laws were passed to prevent wanton money creation. Even borrowing was constrained. The United States has a law theoretically limiting total government borrowing, but the debt ceiling is suspended until July 2021.
The MMT crowd’s response: “Chill”. Borrowing is fine, since effective governments can always match taxes from holders of official debts to interest payments to them. In practice, domestically held government debt is basically a round trip to nowhere. To keep things simple, governments should just create enough money to get done what needs to be done.
The platinum coins were first suggested during the 2009 financial crisis, when the U.S. debt ceiling was still in place. The idea was to take advantage of a legal loophole, which permitted minting coins. The overvalued metal would be deposited in the Federal Reserve, providing the backing needed for a massive, and debt-free, fiscal stimulus.
The ruse is no longer required, but the monetary point is still valid. The government creates legal tender, and it can create as much of it as is deemed economically or political advisable. The buck stops, literally, with politicians.
During the previous crisis, governments ran big deficits to counteract a dramatic shrinkage of money spent elsewhere. The need was clear. Perfectly capable workers were losing their jobs and readily available economic opportunities were not being exploited. Money, lots of it, was the key to getting real activity back up.
This time is quite different. The quarantines imposed to slow the spread of coronavirus are cutting back employment and production, by 20% or more relative to pre-pandemic levels. For the sake of justice, and to ensure that what can be produced can also be paid for, it’s crucial to keep up the spending power of the suddenly unemployed.
In effect, the current policy goal is to ration available goods and services so that everyone gets a fair share. For speed and simplicity, the best way to do that is by using newly created new money to maintain the incomes of people who no longer have jobs to do. That’s what most European countries are doing, and what the roughly $2 trillion American stimulus plan currently being debated would do. Central banks are doing their part, ensuring that the financial system is overflowing with money.
For now, no problem. Mint the platinum coins, crank up the presses, press the buttons, let the money flow. There is a crisis on, national unity is the order of the day, and public shame will keep away price-gouging. Worried citizens and companies will simply save almost all the money left over after the limited supply of available goods and services is exhausted.
Later, though, things could be different. If even moderately tight quarantines last for months, the surplus of money over the total cost of what is available will start to become considerable. Some of that money may start to wander out of inert savings accounts. If it goes into financial markets, asset prices will boom and perhaps bubble. If it heads into the productive economy, it could bid up wages and prices, maybe by enough to end four decades of quiescent inflation.
In theory, such unhappy outcomes are totally unnecessary. Governments can destroy money with the same ease with which they create it. A one-time post-coronavirus tax would kill off any monetary toxicity, along with bringing a big budget surplus.
However, the politics of taking money away from people are much more challenging than those of giving it to them. It’s hard to imagine Tlaib or Kelton ever banging the drum for melting the deficit-coins.
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