Average Joe Doesn't Understand Economics

The press flowing (and comments made from that press) from the 'new' idea of the US Treasury minting a new $1 Trillion coin has made me come to the unfortunate conclusion that the press and the average Joe commenter doesn't really understand economics.  This is despite the fact that I'm sure many of them took macroeconomics in school.  Actually, it's probably because of it.

Things that people don't understand:

First, in neoclassical macro texts, teachers tell students how there is a limited supply of funds and that if the government spends it must be taking real resources out of the private economy.  This ignores the fact of course that our 'funds' (ie. money) can be created at will by the US. government as the sovereign controller of its own fiat money.  Fiat meaning that the money is backed by faith, not by any commodity like gold, silver or platinum.  In the real world, the only reason the government borrows money at all is purely due to institutional constraints to the treasury and Fed.   Presently, when the government spends money, it needs to issue bonds.  So the treasury issues bonds, floats them on the private market, and 'borrows' from private citizens or other governments etc.  The US then has an obligation to pay interest on those bonds, but it can always do so, because again, the money can simply be created by the government   But the system need not be set up in such a confusing way.   Were it not for this constraint, there would be no reason the treasury can't just make the funds appear out of thin air, walk over to the Fed, and use that coin to pay for it's spending.   Public 'debt' can be wiped out with a click of a keyboard - no bonds needed.

Enter the $1 Trillion coin!

There is a loophole that says the treasury can mint and use platinum coinage at its discretion and there is no limit to the amount of dollars that coin can represent.  This is a kind of power that the treasury doesn't typically have.   Here comes thing #2 that people don't get about economics.  We are not on the gold standard anymore.   Our money doesn't have to be or be backed by equal value of a commodity.  One platinum trillion dollar coin does not have to be made by or backed by $1 trillion worth of platinum.  It can be a simple small coin the size of a dime, with $1 trillion etched on it - for the very same reason that our $100 bill is not made out of $100 worth of paper and ink.   So, shame on NBC.  And the sheep.  But particularly, all real blame goes to the economics profession for failing these people!

But won't that cause inflation?

Here is thing #3 people don't understand: money doesn't cause inflation.   Demand (spending) pressure exceeding supply pressure (production / productive capacity) causes inflation.   When demand exceeds supply, people start circulating more and more money around the system, but for a given level of real output, all that does is raise prices.  The misunderstanding here is that most neoclassical mainstream economic textbooks assume that the more money the government makes, the more borrowing and spending that happens.  But that is ridiculous.   One need only see the massive amount of money the government has put into the banks to see that banks don't loan more money just because it's there.   This is classic chicken / egg problem.   Textbooks say more money means more spending.  Reality says more spending means more money.   Spending over our means is a problem - but not one in our present depressed economic environment.

In any case, the $1 trillion coin could not possibly create inflation anyway, even under the textbooks' models, because it will never even reach the private banking industry.   The treasury would use it to pay it's debt, accounts would be credited and debited, and the coin could be melted down.  The coin is just a legal means to get the Fed to allow the treasury to pay down a portion of it's debt.   The actual end result is simply someone at a computer changing two sides of a ledger.

Why do we get taxed at all then if in reality the government can just make 'funds' out of nothing?  

Because in a modern market driven largely by complex financial business, market functionality is inherently unstable and prone to speculative bubbles and bursts.   One way these bubbles form is when people have access to too much liquidity via credit and go on a spending spree with their credit cards that they can't really afford.   This kind of thing often results in certain markets being significantly over-priced (like housing in the early 2000s) and then when a crash happens it can obviously wreak havoc on everything and everyone, around the globe, much as it did in 2008-2010.

Taxes, aren't really sources of 'revenue' for the federal government.   The only real purpose they serve is to regulate demand (spending pressure).  Higher taxes reduces spending pressure (particularly on investment) and reduces potential bubble creation.   This is thing #4 that people don't understand and it's probably the most counter-intuitive.  In most neoclassical macro texts, taxes are treated as a part of national savings - part of a pool of limited funds from which to draw from for spending.   But it really isn't.   Taxes aren't needed to fund federal spending, and therefore taxes are not revenue, and therefore taxes are not a 'pool of funds' used to pay for anything.  Their sole purpose is to regulate the economy and redistribute income  - to keep it from getting too hot or too cold - and to ensure that the inequality wealth gap does not get out of hand.     

The real culprits....

...are the mainstream economists who continue to tell outdated or just flatly wrong tales about how our economy actually functions.  In the sense that many politicians take their cue from these economists, it's actually economists that are then to blame for our political problems.  The $1 trillion platinum coin can solve our economic problem, but it can't solve the political problem that has been created.   That takes something more than money.