Saturday Morning Essay: The Platinum Coin Gambit

"In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule.”
― Friedrich Nietzsche

I think it's a good idea to reprise this fine aperçu  from the great Friedrich periodically to remind ourselves that the lunacy we are seeing in high places in the United States is not actually unprecedented in either magnitude or duration. We should take what comfort we can from that observation.

 America, as we know, is plagued by money problems.  We have a fundamental mismatch between, on the one hand, the demands of hoi polloi (from the Greek: the masses) to be rescued from a dysfunctional economic system which no longer provides a reliable means of securing their vital heat; and, on the other, the resistance of the plutocrats (that higher stratum of American society which through either monopoly or participation in global commerce has commandeered all the money) to disgorge enough of their (often filthy) lucre to provide for these same hoi polloi. 

In simpler terms: wealthier Americans, who already pay a greatly disproportionate share of income and estate taxes (as opposed to Social Security taxes, which are more broadly spread), do not want to give up even more of their money in order to fund Social Security, Medicare, Medicaid, food stamps, unemployment, Social Security Disability, and welfare.  While the relatively affluent are greatly outnumbered by America's Wretched of the Earth, the American political system (through the marketing-based electoral system) is run on money, and so a balancing between the unruly demands of a democratic process and the rights and privileges of the aristocracy can be maintained. 

Yet it produces great tension, because the natives are restless.  They want as much money as they can get from the government, because increasingly that's all the money there is for them, and the government is funded, one way or the other, by the rich.  We have arrived (as societies periodically do) at that point in Marxist devolution where things could blow sky high.  Thus, we see dangerous symptoms of the dysfunction, such as the Debt Ceiling Crisis, appearing now for a return engagement following its roll-out in the summer of 2011.  Or the Fiscal Cliff, a trap of Congress's own devising to force another crisis.

And now: the Magic Coin.  Yes, it's come to that.  In a dramatic flourish straight out of the perfervid imagination of J.R. Tolkien, serious adults in the United States are considering fabricating Our Precious to bail us out of our fiscal difficulties.  Learned intellectuals such as the strange, troll-like Paul Krugman, who presides over the economic debate at the New York Times - he thinks it's a good idea.  The cultish membership of the Modern Monetary Theory movement - they say, why not? 

It "works" this way: using a statute in the United States Code Annotated (USCA) which obviously has nothing to do with its application here (the statute is clearly about specifying details for ordinary coins and authorizing the minting of commemorative coins), the Magic Coin people seriously suggest that a way for President Obama to circumvent the debt ceiling problem, which limits federal government borrowing, is to find another source of income besides borrowing.  And they believe they've found it in 31 U.S.C. § 5112.  Continuing with the logic:  since this statute makes reference to the minting of platinum coins in "any denomination," the Magic Coin advocates (apparently with a straight face) argue that this provision empowers the Executive Branch (through the Treasury) to mint a platinum coin with a face value of one trillion dollars, or whatever value the Treasury Secretary likes, simply by sending a memo over to the U.S. Mint with the instructions, "make me a platinum coin with an eagle on it, put the 'in God we trust' thingie in its beak, and around the edge, put a one with twelve zeroes after it.  Then take it over to the Federal Reserve and deposit it into our account. And don't accidentally use it in the Coke machine on the way there."

Thereafter, the U.S. Treasury would commence writing checks against the coin, all borrowing and issuance of Treasury bonds obviated.

It behooves us to pause and consider where we are in American history when ideas such as this gain currency, to coin a phrase about coining a coin.  I do think the Magic Coin gambit is helpful in the sense that it highlights the nature of  the increasingly insane games that the federal government and the Federal Reserve are playing in creating money out of thin air to keep the American project afloat. Because you can certainly argue that the Magic Coin is simply a variant of Quantitative Easing.

I think when all is said and done that the Magic Coin is symptomatic of a society that desperately wants to hang on to the illusion  of its traditional prosperity and of its cohesion as a society with a national identity, when both of these things are  long gone.  The economy has stopped working, it has stopped creating truly viable employment for the masses, we've been stuck at the same number of jobs for over ten years, and the jobs are of increasingly poorer quality, less remunerative in real terms, and the "hiring" numbers have to do with folks in the 55 to 70 year old demographic resuming the trades, professions and businesses they once pursued, relinquished, and then desperately sought to do again when they realized they were going to need the money.

Magical thinking shows up when you've run out of real ideas and real solutions, which is where we are now. You can avoid all the hard work, all the struggle, and settle down into a comfortable senescence with a National Get-Rich-Quick Scheme.

A Saturday Evening Post: the fiscal cliff and statistical thermodynamics, all jumbled up

"This postulate is necessary because it allows one to conclude that for a system at equilibrium, the thermodynamic state (macrostate) which could result from the largest number of microstates is also the most probable macrostate of the system."

Building therefore on the seminal work of James Clerk Maxwell, the Scottish wundermann, and Ludwig Boltzmann (the Austrian Boltzmann): well, first I have to admit that statistical thermodynamics works better with inanimate entities like gas molecules in a glass box than it does with the United States Congress.

It's the end of the year, and on all the doomsday sites that I peruse from time to time, the doomsayers are reviewing their prognostications for the year just concluded (that being anno domini 2012, or B.C.E., if you read Richard Dawkins, as I do).  Most are astonished that the American economic system has not collapsed entirely.  They give various reasons for this, usually couched in the pseudo-techno speak that is the lingua franca of the Internet InstaVisionary.  We have "kicked the can."  We are "printing money in order to avoid the necessary re-set" of the standard of living.  And so forth.

Actually, I think the true answer lies in the fundamental mismatch between the needs of a self-proclaimed visionary (Karl Denninger, James Kunstler, Dmitry Orlov, Tyler Durden, et alia) in commanding an audience of rapt Doomophiliacs and the actual, slow, boring processes involved in the devolution of a complicated system (such as the American economy, embedded as it is in the global economy and occupying a unique place among the nations of the world because of the size and maturity of its economic institutions).  To wit, if you say that the American economy will look very different in 2025 (as it very well might) and let it go at that, your readers will switch the channel to the gal writing the blog about how to build a house out of pipe cleaners, or whatever.

The American economy has been in a state of transformation since the early 1970's, and the process continues.  What one can say about where we are now is that the true function of an economy (providing the means for the populace, the 99% comprising the mass of American commoners, to earn a living and enjoy life) has gone seriously off the rails.  However, the forces attempting to perpetuate the macrostate most conducive to the overall needs of the populace are formidable indeed (they act purposefully, unlike the random Bernoulli motion of the gas molecules in the glass box).  And thus the transition is retarded, slowed, as the institutions attempt to retain the idealized macrostate, one formed in the collective consciousness in the 1950's or so.

This makes for lousy headlines on the Doomsday blogs, however.  "America continues on slow path toward transitional state."  That's just not going to glue the eyeballs.  The Doomers use the symptoms or characteristics of the changing macrostate to rush the prognostication.  The symptoms include:

1. A changing-out of highly-compensated employment for minimum wage jobs (the "crap jobs"  or McJobs of the New Economy).  In the single, monolithic "unemployment figure" (say, of 7.7%) this changed macrostate is not reported directly, because the political system seeks to reassure the electorate that the economy is making progress, although it isn't.  For this reason, the average compensation, in real terms, of American workers continues to decline, although prices paid for necessary goods and services (also in real terms) continues to go up.  This is called "losing ground."

2.  The better paying jobs of the Old Economy (manufacturing, production of high value-added things such as cars and computers) have been shipped overseas as part of global wage arbitrage, or have been replaced by automation, which provides a return on capital but does not pay a living wage to carbon-based life forms. This leads to the problem of Symptom No. 1, above.

3.  The "organic society" of interdependent parts, of which the American economy is perhaps the apotheosis, is highly sensitive to perturbations of its macrostate, since the humans comprising the system have little hope of actual existential independence; that is, the means to maintain their vital heat depend on the overall functioning of a huge and fragile economic contraption.  This vulnerability, as the American system has entered a long period of disintegration, results in a massive move toward dependence on the chief organ of the macrostate, the federal government.  We have seen, therefore, a tremendous increase in food stamp usage (to 50 million Americans, or about 16% of the populace), spikes in Social Security disability claims (utilized to anticipate the old age pension which follows later), Medicaid, and long-term unemployment.

There is little argument from anyone these days that the American political system is more or less completely dysfunctional, in the sense that what appear to be common sense "solutions" to these daunting problems are not in fact adopted.  I think this is a serious misreading of the real problem.  To a large extent, the devolving macrostate described above did not come about by accident or through inattention.  The three symptoms listed above (and a fourth, the complete failure of the economy to increase the absolute number of jobs for about a decade) all point in the direction of income and wealth inequality, and since command over the political system is highly correlated to wealth, the ultra-rich now control the political process, or can muster enough support (through obstruction in the House of Representatives, particularly) to game the system in such a way that the most obvious solutions cannot be used.

The most obvious "solution" is a form of socialism in which the wealth of the uber-rich is in effect confiscated, through "wealth taxes" (a direct charge against net worth, exacted annually) and other highly confiscatory taxation.  Since this is where the money is, as Willy Sutton told us, this is where the money to support a dependent population must be collected.  The rich, who are badly outnumbered by the hoi polloi, resist this obvious "solution" through their command over the political system.  It's all they've got, besides all the money.

To maintain the current favorable macrostate, the uber-rich will yield on the questions involved in the "fiscal cliff," after milking the process for all advantages possible (the lowest possible rise in the progressive tax system, for example, and changes in the entitlement systems, which Obama seems prepared to allow).  The "fiscal cliff" is a chimera which will evaporate soon, as the errand boys and girls for the rich (Congressional members) go through a pantomime of earnest consideration and then cut the best deal they can for their benefactors, while reassuring the electorate (who are needed to continue their positions of power) that their best interests are being served.

A slightly modified macrostate will ensue, with a dysfunctional economy continuing to stagger in the general direction of a Third World condition (for most Americans), with entrenched wealth inequality, and with nothing else changed.