Submitted by Derikoopa t3_zyxr5r in explainlikeimfive
I'm sure this is something that wouldn't work because I thought of it, and I'm not an international leader xP But let's say this country owes 6 billion dollars in debt, what is to stop them minting 6 coins each worth 1 billion dollars and using them to pay the debt. Presumably, because there's only 6 of them and they are taken out of the economy instantly, they wouldn't hyperinflate the currency? Any and all help is greatly appreciated
I was under the impressions that the “trillion dollar coin” proposal was an accounting trick to try to get around the artificial “debt limit” that Congress imposes on itself.
There have been structural budget deficits for over twenty years, so every couple of years the debt limit is raised.
Every so often, a group of newly-elected House members decides they are going to engage in brinksmanship with raising this limit — not fully comprehending the global financial meltdown that would occur if the government actually defaulted on its debt. In the end, the debt limit is ALWAYS raised. There is no other option.
So, people get annoyed with this game and try to find ways to render the “debt limit” meaningless. You could pass a law eliminating the debt limit! But if you don’t have the votes for that you get creative.
This old proposal was for the treasury to mint an trillion dollar coin and then deposit it in the Federal Reserve. It is not circulated. I don’t think something like that could even be “spent” (anyone got change for a trillion?). But in accounting terms it would count as an asset which would keep us below the “debt limit”. The government wouldn’t default. Brinksmanship by newly-elected Congressmembers is no longer a thing.
They’ll never do it though. It sounds too insane and “it’s just an accounting trick” is not an explanation that would sit well with potentially horrified voters.
Thank you! I'm imagining the economic nightmare of trying to pay for your weekly shop, and all you have is a 1 billion dollar coin xP Man, I thought my billion dollar coin idea was ludicrous, but according to your link, I should have been thinking in the trillions xP
But what if one country was in debt to another country and to pay back the debt, they give them a shitload of money printed specifically just to pay off the debt? Wouldn't it then be the case that this surplus of money is instantly taken out of the first country's economy and then it shouldn't cause inflation there?
Then the lender country has billions of dollars of the borrower's currency. They're either gonna spend it in the borrower country, or they're gonna sell the currency for another currency. If they simply spend it in the borrower country, that will inject the currency right back into their economy, causing inflation.
If they sell the currency, the massive surplus of that currency will cause the international value (exchange rate) of the borrower currency to fall, weakening it on the international market. That makes it harder for the importers in the borrower country to buy foreign goods, so they have to charge more domestically to make up the difference. That will cause a rippling price increase across the borrower's economy.
If your money supply was X and then you increase it to 1.5X, you can't get away from the fact that your money supply increased 50% overnight, no matter where it goes.
Every government are classical economist in good times and Keynesian in bad time. That really frustrates me
What makes the coin worth a billion dollars? Nobody will accept it if there's nothing to back-up that valuation.
Surely, if it's a country decision lt's gone through a treasury, then at the very least, the people in charge of the currency that this country uses have declared it to be worth a billion?
I now declare this comment to be worth $1,000,000. I can sell it to you for $1,000. You wanna buy it?
I see you know how NFTs work.
Are you drunk?
In this case I assume it would be Reddit themselves who declare your comment was worth a million
ANYONE can declare something. It's just a matter of how much stock you put in the declaration.
No, you can't just declare that a thing is worth a billion dollars if you've got nothing to back it up.
Even the shadiest of financial schemes like NFTs have an idea and a market that may decide an NFT that has no inherent value has a tradeable value, but there has to be something that will persuade other countries that the coin can be converted into a billion dollars.
the coin itself is not important if its not backed up by either its value in some other commodity(like gold, when the gold standard was still a thing) or the promise of economic staiblity of the entitiy issuing the coin(essentially guaranteeing you at you can at any time exchange said coin for its value on the respective currency)
the1st requires that you actually have said commodity in stock ready ot exchange, whiel the latter requires that your nation has the economic might to be good on this promise else i will not trust that coin.
I recently came across this example: An object is worth $100. 100 coins are produced so each coin represent 1/100 value. If you subsequently print 100 more coins, each coin becomes less valuable at 1/200. The total value of the object remains the same, there are just more coins representing that value. So think of the "object" as a country's value globally. In the global market, the value of the country stays the same. Printing more coins results in each coin being worth less. Does that make sense? I'd like others to chime in if I missed the mark.
This makes sense in terms of a currency backed by the gold standard, but since that doesn't really exist anymore is it still relevant?
It is relevant because the effects inside the country and the effects in the global market are different. If Best Buy brings in a Panasonic TV from Japan, Best Buy has to give that country a certain amount of money that is relative in that country. So Best Buy has to pay the equivalent of $500 in Japan, then sells it me for $900. So sure, if my country prints more money and I get a raise, I can better afford the $900 TV locally. The problem is that after printing more currency, my dollar is worth less globally, due to my initial example. As a result, Best Buy will now need $700 to meet the same value for Japan in Japanese currency. In turn, the next time Best Buy sells me a TV, they need to charge $1200.
Further to this, all exported goods cost more to bring in. This is how it effects the poor. If the poor don't get a proportional increase, then basic goods cost more. The poor get poorer.
First thing: this only works if your debt is denominated in your own currency. In other words, if you're the US and your debt is in US dollars, you can do this. If you're Argentina and your debt is in US dollars then you definitely can't mint a billion US dollar coin to pay it off.
>Presumably, because there's only 6 of them and they are taken out of the economy instantly, they wouldn't hyperinflate the currency?
There's the trick. Why do you say this money is taken out of the economy instantly? Let say the government owes me $1 billion and gives me one of these coins to pay off that debt. I'm not going to want to keep that coin locked away, I'm going to want to spend or invest it!
I hadn't considered international currencies. Perhaps you could mint your own country's currency according to the exchange rate?
I will say you've got me regarding the economy. I suppose I was thinking of debt as a human being, that if we are all in debt, then we all have negative money. Therefore, once the coin had been sent to the central bank, it would just kinda.... exist or something xP
The problem with that first plan is that exchange rates aren't fixed. Generally the more money you print, the lower your exchange rate will go.
Also it is possible for the government to create this money, then take it out of circulation. It produces a billion dollar coin, and then raises taxes (but not spending) by a billion dollars.
Of course, if you pay me $1bn for my debt, then immediately hit me with a $1bn tax, I'm not going to be very happy.
They can, but it's not always beneficial. A countries "debt" isn't the same as personal debt. The point of it is to remove some currency from circulation to help control inflation. Monetarily sovereign countries can pay it all off whenever they want.
When you say remove currency, do you mean in coins or across all facets like digital?
All currency, although for bonds and bills it's mostly from reserves held at the central bank
There were nine one million pound (sterling) notes issued in the UK in 1948. This was done for a short term to shore up the UK economy pending a loan from the USA.
Fascinating! I thought this idea was purely hypothetical Do we know what happened to them? I assume they are laying in some bank?
All but two were cancelled and destroyed, these two were given to American and British treasury secretaries and are in private hands. Serial number ‘8’ was auctioned off for £69,000
A country being in debt is not a problem in and off itself, there are plenty of posts on this sub that go into that, so I won’t here, but what is a problem for an economy is if faith is lost in the currency and printing that much money would certainly do that. Money doesn’t have any value in and off itself, it only has value because we believe it does and that its a stable way to trade value. If the county is willing to create huge amounts at will to pay debt that erodes that faith in stability.
Couldn't the argument be made that a ridiculous amount of debt also reduces faith in the currency?
If the debt was past due maybe, but that would be because the country couldn’t pay its debts not that it had them.
debt for a nation is not the same as for an individual.
the kind of debt nations want ot have is the one that is created in the effort of improving its own infrastructure and industry, whihc would in turn allow the nation ot generate Wealth that can be used ot pay off said debt(at the veary least pay off the interest)
bad debt for a nation is the one that is created ot do anythnig else other than that.
in this situation the only way you lose faith in the currency is if the nation itself experiences such crippling economical collapse that it makes all major investors panic, resulting in them cahing in to pack their sht and leave.
But what if someone wanted to use that money? no one gets money and proceeds to never use it ever.
True, I suppose it's not viable in the event that a country owes money to an individual. But against countries or banks? I'm not so sure
Other countries and banks use their money too. If a bank suddenly has its hands of a billion Imaginationland dollars it might exchange those dollars in to another currency it wants more by trading with a corporation that intends to use those Imaginationland dollars to make payments on a contract they have with a company in Imaginationland that needs to be paid out in Imaginationland dollars.
Or the bank might use those dollars to buy shares in Imaginationland corporations listed on the Imaginationland Stock Exchange, which would result in those billion dollars going in to the accounts of the Imaginationland corporation that issues those stocks for sale and then they'll use it to pay salaries, pay out vendors, etc
It'll always find its way in to circulation somewhere.
There isn't any value in "paying off debt" at a national level. The debt is scheduled in the form of bonds, which are treated as investment vehicles. Debt is "payed off" when holders cash out their bonds, which they can do voluntarily at any time (with some limitations/penalties for early liquidation) and which the government (US anyway) never fails to cover. If the government forcibly bought back everyone's bonds prematurely, it would destroy the value and trust in bonds as an investment, destabilizing the global economy in several different ways.
The government is not a business or a household, so the imperative to operate at a net surplus just isn't there. The extension of government debt is a sign of continued expectations of growth and political stability. Trying to remove all the debt from the system is like trying to collect all the rainwater in a region and store it in barrels instead of letting it cycle through the earth and natural bodies of water. It might seem like "saving for a rainy day" but really you're preventing a resource from flowing through the system where it can do the most good.
Any central bank can do this, even without a coin. It’s called monetizing the debt.
What happens when you do this? Well you can follow the money. There are two situations.
The central bank immediately prints money (or buys the bond) of newly created debt. Normally, when a government spends money, it increases aggregate demand, and the debt/bond itself is a way of decreasing aggregate demand. Having the government immediately pay off the bond/debt means that you increase aggregate demand. This can lead to inflation if it’s too much aggregate demand.
Quantitative Easing: You pay the debt off by buying the debt off some bond holders. These (generally wealthier) bond holders then gain cash, and will invest some of it (increasing asset prices like stock) and spend some of it, leading to an increase in aggregate demand. If the increase in aggregate demand is too much, then you will notice meaningful inflation.
Many other comments mention stuff about faith in the currency, but this doesn’t really hold unless inflation expectations become very high. Many governments have done this without people losing faith in the currency. Money is simply a tool to balance supply constraints with demand. Printing money is just a way to increase demand and when done correctly can match demand with supply.
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Printing money doesn't create value, it merely redistributes it. So to a limit printing money works as a tax on owning currency, but of course if that tax burden is too high then people will rather not own that currency and strive to exchange it for anything else they can. That's how you get hyperinflation and you can't print yourself out of that one because there is no value left to redistribute.
yalloc t1_j28cew2 wrote
>taken out of the economy instantly
They wouldn’t be. Paying debts with printed money by definition is injecting money into the economy. You would “take it out” by a central bank exchanging it for the same value in cash, created by printing new cash.
Anyways this idea has been floated, particularly in 2013. Ultimately the problem is no one knows what would happen. Classical economics says we would see a mass loss of faith in the currency alongside the natural inflation added supply creates. Issue is no one knows anything about economics anymore since classical economics has been shown over this past century to not be entirely correct and it’s a bit of a fear of the unknown at this point. I would imagine we would see significant inflation still, but how much is something only god knows.
The coin itself is not important. No one realistically is going to use it to pay anything. The only reason the coin is important is that it essentially acts as a “voucher” to be exchanged for a truckload of regular cash if by no one else then the central bank. In the end the effect is just a slightly more ceremonial way of printing a truckload of Benjamins.