THE BLOG
01/21/2013 08:36 am ET | Updated Mar 23, 2013

Magic Money

Washington insiders are chuckling over an imaginative proposal to resolve the debt ceiling crisis by simply making the debt disappear. An obscure law enacted at the behest of coin collectors authorizes the Secretary of the Treasury to mint platinum coins in any denomination he may choose. Ergo, he could theoretically issue a few $1 trillion platinum coins, put them in a government vault, and announce that the national treasury is suddenly in the black.

The idea is not being taken seriously. President Obama's press secretary assured reporters the administration would do no such thing, and Federal Reserve Chairman Ben Bernanke recently refused to even talk about it. "I'm not going to give that any oxygen," he said.

But Bernanke should not be so hasty. As a student of the Great Depression, he has said that a major mistake of the central bankers in the 1930s was fear to use unconventional tools to revive the economy. Certainly, Bernanke has overcome any fears he may have had in this regard. His unprecedented quantitative easing, in which the Fed buys up government debt instruments, has pumped hundreds of billions into the economy, keeping interest rates at nearly zero.

I personally cannot see how the concept of a $1 trillion platinum coin is dramatically different than the Fed's quantitative easing. Both represent novel, untested use of the government's power to create money out of thin air. I would like to hear Bernanke's explanation why one is a viable policy and the other would not be. To be sure, quantitative easing entails the purchase of government bonds which are real things that can be bought and sold. But presumably the platinum coins would also be real things that could be bought and sold.

Through quantitative easing we are flooding the economy with magic money in an effort to foster economic growth while adding to the government's debt. History teaches us that this is a desperate measure that invariably fosters inflation and rising interest rates.

The problem is -- in the present environment the old rules do not seem to apply. Our government is spending more than $1 trillion a year more than it takes in, and Bernanke's quantitative easing is pouring hundreds of billions more into the economy, but thus far without rising inflation or rising interest rates. And I might add thus far without much benefit other than to boost stock prices for stocks and commodities.

I am troubled by quantitative easing. Frugal people cannot earn a decent return on savings, which severely impacts older people. It is a bad idea to discourage saving. And other nations are tempted to follow our example, which can lead to a currency war. When it comes to conjuring up magic money out of nowhere, I believe we are setting ourselves up for big trouble down the road, and it matters little whether we do it with quantitative easing or platinum coins.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.