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The Trillion Dollar Coin vs. Limits to Growth

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For those who missed it, the trillion dollar coin rose to public awareness early this year as a novel approach to circumvent the debt ceiling debate. It was interest-free and debt-free, and a few blogs noted the implications for a new, and perhaps better money system. But was the coin sustainable? In other words, what implications does the trillion dollar coin have for sustainability and climate change?

It is tempting to compare the "long term problems" of the national debt with the climate crisis, and New York Times columnist Thomas Friedman did just that the very same week that the trillion dollar coin was making headlines. In Friedman's view, both issues concern impacts on "future generations" that are getting worse and need urgent fixes. Although there are many flaws in Friedman's argument, he correctly noted that, (in the current system) "at some point, the debt will get so large that big tax increases and spending cuts will simply go to pay interest. We also won't be able to bend that curve anymore, and spending on infrastructure, education and the poor will vanish." Paul Krugman responded to Friedman by reminding him that economic systems differ from geophysical systems. Humans can change or invent new economic systems to fit our needs, but humanity's ability to influence Mother Nature's systems is more limited.

The dust up between Friedman and Krugman failed to mention a more important problem: that infinite economic growth requires resources from finite ecological systems. For over 30 years, this argument has been framed by scientists subscribing to the Limits to Growth analysis. Ecological economists such as Herman Daly have pointed out that an economy focusing on true sustainability must strive to reach a steady state.

Such a transition would necessitate a new money system because the current debt-money system is a primary driver of the growth imperative in our economy. The Headwaters Forest in Northern California provides a vivid example. In the 1980s, the CEO of Maxxam Corporation Charles Hurwitz bought the locally-owned Pacific Lumber Company with junk bonds that he was forced to repay at high interest rates. When the trees did not grow as fast as the compound interest he owed, he started clear-cutting old-growth redwood trees to make the interest payments.

Here's where the trillion dollar coin proposal comes in. The trillion dollar coin is an outgrowth of Modern Monetary Theory (MMT), which explains that a monetary system does not need to be debt-based and does not need a positive interest rate. Money could be spent into circulation by the government instead of loaned into existence by private banks. MMT is empowering to supporters of active government. It provides an economic justification for increased infrastructure spending, universal education and health care, and dispels fears of debt and deficits. It makes the conservative austerity program sound ridiculous, makes the bankers seem greedy, and makes the ratings agencies look pointless and silly.

Compared to the existing debt-based money system, the MMT approach has fewer restraints on money creation, and therefore allows for more economic growth. However, ecological limits mean that the Earth cannot tolerate any more carbon emissions from economic growth. The money supply must be decoupled from carbon. It should not be expanded in ways that will create additional purchases of fossil fuels, or send more money to oil exploration companies, or to oil-exporting countries.

Some MMTers have begun to consider this issue, but a serious solution may require additional perspectives. In addition to MMTers, the monetary reform movement includes libertarians such as Ron Paul and other "Goldbugs" who support the Gold Standard. They believe a currency will hold its value better if it has a commodity-backing. In their view, the limitations on the supply of a rare commodity such as gold will encourage monetary restraint to prevent inflation. This limits the amount of currency in circulation, thus preserving the value of the currency despite government tendencies to spend profligately on overseas wars or social programs.

Although MMTers acknowledge that poor choices in spending could devalue the currency, they feel that most inflation fears are overblown since they often ignore the context of historical hyperinflations that occurred when the sovereign debts were held in foreign currency, or when the domestic economic capacity had been decimated by a World War.

MMTers and Goldbugs are in a stalemate, perhaps because they prioritize different uses of money. MMTers focus more on the "exchange value," while Goldbugs want to preserve money's role as a "store of value."

Given these factors, it may be possible to take the best of both MMT and Goldbug thinking, and develop two or more currencies to allow the economy to grow in terms of local, low-carbon services, but to shrink in terms of high-emitting global industrial activities.

One way to do this is create a carbon-backed currency that acts as a "store of value." It would be backed by a limited number of permits under a cap on greenhouse gas emissions. As the number of permits decreases over time, the value of the currency would increase. Because it would incentivize saving, but not spending, the carbon-backed currency would function well as a national or international "store of value" but not so well for exchange value. So society could also have a local or regional electronic currency that is spent into circulation as local, low-carbon economic activity takes place. These ideas are compatible with writings by the late economist Richard Douthwaite of the Foundation for the Economics of Sustainability (FEASTA) who authored a chapter on money and energy in the FEASTA publication Fleeing Vesuvius.

Though never minted, the trillion dollar coin has been valuable in many respects. For many people it is the first time they seriously considered the existence of an interest-free, debt-free monetary instrument. The coin has provided a glimpse of possibilities for monetary reform, including discussions of the linkages between the money system and the limits to growth, and potential solutions involving multiple currencies: one for a store of value backed by limited carbon emissions permits, and another for exchange value based on MMT principles.

Is the trillion dollar coin sustainable? If it helps inspire ideas to solve the planet's economic and ecological problems, it sure can be.