Coining Money

The blog has been quiet largely because there’s nothing much to say when the economic situation becomes so patently absurd that no-one should be in any doubt of the eventual outcome. Perhaps nothing has underlined this absurdity more than the idea of the trillion dollar platinum coin. Endorsed by Myrdal prize winner Paul Krugman, the idea of minting such a coin was proposed as a way for the government to sustain its deficit spending without violating the statutory debt limit. Fortunately, the Treasury and the Fed have both, as of last Friday, renounced the idea.

Chairman Bernanke and his fellow Keynesians, MMTer’s, etc., believe that the economy is languishing due to a lack of demand, so they continue to attempt to stimulate consumption by expanding the supply of money. And to a degree they are succeeding, in the great tradition of the broken window fallacy. November’s trade statistics point out “that which is not seen,” which is that consumption is boosted to the benefit of foreign exporters, not US domestic producers.  Investing in US production is unattractive compared to foreign alternatives, so employment continues to move offshore, leaving a US economy burdened by bills that it will not be able to pay. Growth in the US economy requires investment, in skills, plant and equipment, infrastructure and innovation. So long as the government continues to ignore these issues and attempts to paper over the problem by adding to a mountain of debt the situation will continue to deteriorate.

This debt-funded consumption is the result of a sovereign credit bubble. It is a classic Minsky bubble where the Ponzi borrowers are the US people, willing or not. So far it continues to grow. The perceived value of the dollar and its reserve status depend on the credibility of the US government, which is slowly eroding, as exemplified by the platinum coin idiocy. The bubble will end, either in deflation or hyperinflation. We are due for another Minsky moment. By the way, check the date on that previous post and then check your charts to see what happened next. I think this one is much bigger, because the Fed is now “all in.” But we’ll see.

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