Color me Confused

Joe Salerno has written an article entitled “The Flipside of the Trillion Dollar Coin.”  From the first time I read the article, I have struggled with many of his conclusions and statements – both on monetary issues, as well as political issues.  You can see a small taste of my confusion in the comments section, for example, Salerno’s comments as basis for my initial question at the site:

When new money is injected into the economy via open market operations, as it is today, it expands bank reserves….In contrast, when the Treasury creates money it does so by writing checks for bureaucrats’ salaries, for entitlement payments, and to pay vendors for government purchases.

I thank vikingvista for patience in replying; however I remain unsettled regarding his replies.  As most (but not all) other comments seemed to be supportive of Salerno’s views, I have decided not to clog the thread up further with my confusion.

Additionally, I struggle with Salerno’s political conclusions as well, for example:

Last but not least, as an adjunct of the Treasury, the Fed would no longer function as bailer-outer of last resort…. A partisan Treasury under the watchful eye of the congressional opposition and in full view of the public will have to make these decisions.

In my ongoing struggle with many of the statements in this article, I have decided that the initial question (as well as follow-on questions) I asked at the Mises site, as well as the political point raised above are of secondary importance.  I will come to address these later in this article, however I would like first to focus on these two points made by Salerno that most color me confused:

Thus, at a given level of government spending, siphoning off resources from the private economy via deficits financed by money creation is no worse than extracting them through taxation….As outlandish as the idea of the $1 trillion platinum coin at first appears, it gives us a glimpse of a monetary arrangement that, although far from ideal, is superior to the current system.

I am confused by both parts of this: 1) between these two alternatives, I believe the method that government uses to extract resources does matter, with money creation being worse than taxation, and 2) if offering for the dollar relatively more credibility is of value, the realities of politics would make this system inferior, not superior.

The system that is behind the idea of the trillion dollar coin is one of money creation from nothing, just as the Fed does today, but with two twists: a) not brought on via debt, and b) controlled by the Treasury Department as opposed to a supposedly independent central bank. Salerno is arguing that inflation (of a slightly different sort than that which exists today) is better than deficits paid for or financed with actual production.

Many propose this today (most famously Ellen Brown), and I have always viewed it as a step in the wrong direction from current methods (although it would likely bring down the dollar even faster, if that is what you like).  Salerno is suggesting it is a step in the right direction, a system “superior to the current system.”  I am reeling….

From the point of view of Austrian public finance theory, the method of governmental "revenue extraction" does not matter nearly as much as the total amount extracted….For all government spending, including transfer payments, drains resources from productive uses in the private economy and squanders them on the wasteful spending of politicians and bureaucrats….

I take no exception to this statement. 

…let us grant for the sake of argument that congressional control of monetary policy alters the mix of financing government spending toward less taxation and more deficits paid for by money creation.

For example, if confronted with a choice between an annual U.S. government budget of $2 trillion financed wholly by money creation and a balanced budget of $4 trillion, Austrians would without hesitation choose the former as less disruptive of the market process and less injurious to the welfare of individuals who earn their income through peaceful production and voluntary exchange.

This example Salerno offers is not consistent with the idea that he is suggesting in the article.  His argument is “at a given level of government spending,” having the Treasury create debt-free money “is superior to the current system.”

Therefore, I will rephrase his example to fit what I understand to be his primary point: if confronted with a choice between an annual U.S. government budget of $2 trillion financed wholly by money creation and a balanced budget of $[2] trillion, [Salerno] would without hesitation choose the former as less disruptive of the market process and less injurious to the welfare of individuals who earn their income through peaceful production and voluntary exchange.

I read his statements over and over, and conclude that my above re-phrasing is the point Salerno is arguing.  If someone reads his article and can demonstrate why this is not what he is saying, please explain.

I will (very) humbly disagree with his conclusion.  In both scenarios, the government is making claim on $2 trillion of resources, depriving private actors of disposing of these resources as they otherwise would see fit.  In both cases, this is equally disruptive to the economy.

However, in the case of a balanced budget, this is where the disruption ends (absent some minor variations in the supply-demand derived prices of the goods acquired by the government that would not have been acquired by private actors, and vice-versa).

In the case of government spending financed wholly by money creation, there are other, significant effects:

1)      While value is subjective, artificially increasing the currency units in which the objects are valued will decrease the value of those units already in existence.  This would seem to bring on unknowable distortions throughout the economy.  Money is one side of every transaction: because of this, artificially increasing the money supply would seem to affect 100% of the economy as opposed to the subset affected by the portion based on government spending.

2)      The impact to the value of savings.  At least with taxes, the impact to savings is known and clear: pay the tax, have less to save.  This is immediately quantifiable.  This can be planned for, with a reasonable degree of confidence.  With artificial money creation, the impact to savings is unknown and unknowable. 

3)      Yes, one can argue that it cannot be known what a dollar will buy in thirty years in either scenario.  But which scenario offers the saver a better chance to make a good forecast?

I have long believed that the distortions of artificial money creation – in any form – are worse than any government financing scheme done with honest money.  Salerno suggests otherwise.  This has thrown me for a loop.

In addition to this primary point of confusion, I would like to return to a couple of other themes raised by Salerno in this post that do not sit right:

When new money is injected into the economy via open market operations, as it is today, it expands bank reserves….In contrast, when the Treasury creates money it does so by writing checks for bureaucrats’ salaries, for entitlement payments, and to pay vendors for government purchases.

As mentioned, I asked this question at the site, and the answer received was not satisfactory to alter my view: in both cases, the money ends up in a bank – the recipient will deposit the money somewhere, and that somewhere will be in the system.  It will expand bank reserves in both cases.  I do not see any difference, there is no “in contrast,” yet Salerno is suggesting there is a difference. 

Finally, I have disagreement with Salerno’s conclusions regarding the politics, summarized in this point:

Last but not least, as an adjunct of the Treasury, the Fed would no longer function as bailer-outer of last resort…. A partisan Treasury under the watchful eye of the congressional opposition and in full view of the public will have to make these decisions.

There is no “congressional opposition” when the Secretary of the Treasury says the end of the world is coming unless the printing press is unleashed, as happened in 2008.  Was there any greater “full view of the public” than with TARP?  Did this “watchful eye” change a thing? 

In September of 2008, when Paulson was on bended knee, it made no difference where the money-printing power was.  Would Paulson, as Treasury Secretary, not have printed the money if the control was completely within the Treasury Department?  Would Congress have stopped him?

All-in-all, I am not convinced by Salerno’s arguments.  But worse, I am confused.  If his arguments are true, much of what I understand about the impacts of money-printing – in any form – are incorrect.  Needless to say, much of what I understand about politics would be equally incorrect.

I guess for today I will have to leave it at this.