Progressives truly don’t understand the difference between wealth and money

Paul Krugman, looking smug

Paul Krugman is a Nobel Prize winning economist.  He’s also remarkably ignorant (or stupid or, maybe, both).  Only someone lacking in brains and understanding would think that the U.S. could get out of its debt problem, not by printing paper money, but by minting a platinum coin and then denominating it a “$1 trillion coin.”  Nevertheless, that’s exactly what Krugman proposes.  He thinks (probably wrongly, as it turns out) that there’s a Constitutional loophole that allows the president to “print” a trillion-dollar coin:

Enter the platinum coin. There’s a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector’s items — but that’s not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all.

Did you get that last little bit?  Magically creating a trillion dollars will do “no economic harm at all.”  It’s worth exploring Krugman’s reasoning, to which he helpfully links (since he is, after all, judge, jury, and executioner when it comes to all thinks economic).  I’ll quote him at length, because only then can one fully appreciate his reasoning:

In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.

But leaving the debt ceiling on one side, isn’t it true that since spending can currently be financed by Fed money printing, we shouldn’t care at all about the notional debt owed to the Fed? Alas, no.

It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.

What those three paragraphs circle around is the magic word: inflation. Krugman believes that magically pulling a trillion dollars out of the air won’t produce inflation but that, at some magical point in the future, President Obama will have borrowed so much money that he will be able to pay back the trillion dollars before inflation occurs.  One suspects that Krugman is envisioning a scheme along the lines of check kiting, with Obama borrowing a trillion from the feds, so he can borrow a trillion from someone else, and then use that second trillion to pay back the first.

Dunce cap

The fundamental flaw with Krugman’s whole theory, of course (which even he acknowledges is a “gimmick”), is that it ignores the difference between money, which merely a symbol of varying value, and wealth, which is the real measure of a healthy, rich economy.  Apparently I need to give Krugman my “Economics 101” lecture, the same I used when my kids were nine to help explain to them the difference between money and wealth, and the concept of inflation.  Here goes:

In the old days  – the really old days  – there was no money. Instead, there were goods. For example, you might have had wheat to spare, but you needed a cow. I, on the other hand, had a cow and but was short of wheat. The two of us were a match made in heaven, trading our goods to fulfill our desires.


Problems arose, of course, when I wanted the wheat, which you had, but you wanted a chicken, not a cow. Or perhaps you had wheat, but only a little, and certainly not worth enough to trade for an entire cow.

This old system also had a problem with mobility. It’s simply not feasible to carry bushels of wheat with you wherever you go, unless you have a really big purse. And cows are hard to lead into the pub in exchange for a nice pint o’ beer. Not to mention the fact that you’d need a lot of pints to equal one cow.

Something better needed to come along. And it did: Gold.

Very heavy gold

Gold’s a great substance. It’s beautiful; infinitely malleable; it blends well with other metals; it doesn’t degrade; and it can be replenished, although the effort needed to replenish it ensures the rarity that’s necessary to its value as a commodity.

The only downside to gold is that it’s heavy. Very, very heavy. Get enough gold together, and you’ve suddenly got the weight of that cow to carry around  – and, once again, your purse isn’t big enough.

In all societies, some people, whether through trade, warfare, or outright theft, proved more adept at amassing wealth (whether wheat, cows, or gold) than others did, and they assumed leadership positions. Once in those positions, they tended to demand that their subordinates pay them protection money. These funds protected the hapless payor both from harassment by that same leader and from attacks launched by enemies outside the kingdom.


Eventually, this protection racket got formalized as taxes. Leaders also discovered that, in addition to providing protection for their subjects, there was a virtue in paying for basic services within the kingdom, such as roads, minimal care for the very poor, etc. A well-run kingdom increased everyone’s wealth.

But back to those grand clumps of heavy, heavy gold. Someone eventually got the idea that, rather than schlepping around gold, it would be a good idea to have currency made from lighter weight metals or even paper. These could be used to purchase myriad things that were worth less than a single gold coin and were easier to transport.


Because you couldn’t have random sheets of paper or chunks of silver or copper roaming around in the guise of currency, these money substitutes were useful only to the extent people believed them to be backed by the genuine gold article — and the only way to ensure that people could trust these substitutes was to delegate to a single entity the task of guarding the real gold and issuing the substitute coinage or paper. The entity that ended up responsible for holding the gold and backing the substitutes is government.

There are two important things to remember at this point: First, the substitute money’s worth is always relative to the gold. If the gold is finite, but you mint more coins or print more paper, each coin or note is worth less as it becomes a smaller fraction of the available gold. Put another way, imagine that over a six month period the government keeps printing notes until it has six times as many notes as it has gold. Milk that cost one piece of paper in January will cost six pieces of paper in June. The milk’s value in gold is the same; it’s the paper that became less valuable. (This, I helpfully explained to my kids, is inflation.)

Second, and this is the really important thing, one must remember that, nowadays, unlike the feudal lord of old who went and out ravaged another country to get gold, today’s governments doesn’t go out and amass gold; they just generate the coins and paper. To the extent the government has wealth, it’s because it uses its police power to demand that its citizens give it their wealth in the form of taxes. The government hasn’t created anything. In today’s America, as in all modern economies, only the people create wealth.

Platinum coin

For Obama to mint a platinum coin does nothing to increase the country’s wealth.  It’s just generating a piece of metal to which the Leftist government assigns an arbitrary value to justify taking on more debt that America cannot afford and cannot repay.  For Paul Krugman to advocate this course of action isn’t just ignorant and stupid, it’s reckless to the point of national economic homicide.  Too bad Krugman is incapable of feeling ashamed of himself.

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  • vinny

    I understand this scheme. I have some lint in my pocket which I feel is worth everything that you have in your wallet.  I will therefore give you my lint, in return for your wallet. Of course it helps that there is a gun pointed at your head so that you want to make this exchange as much as I do. They are all thieves.

  • Charles Martel

    I have a serious question, for Book or anybody else here to answer: How did Krugman get to this point of incoherence?
    He is an intelligent, “educated” (credentialed) man, clever enough to have attained high establishment rank and win the hollow accolades that the Nobelists and other PC institutions hand out to faithful duckspeakers. But surely he knows that what he advocates a.) can’t work, b.) doesn’t work, c.) never has worked, d.) never will work, and e.) will lead to certain ruin for the U.S. economy.
    So what does he get out of his mendacity? Is he secretly riddled with cancer and, bitter, has decided to go out laughing at the fools who take the NY Times seriously? Is he pulling an Andy Kaufmann? What’s up with him?

  • BrianE

    The $1 trillion coin is certainly a gimmick, but it apparently would be a legal loophole to increase the federal debt limit without Congress’s authorization.
    Would it have political consequences? Given the cover provided by the MSM, it’s hard to say.
    Would it be inflationary? No more than the rest of the $16 trillion in debt or the additional $4 trillion we’re likely to incur during President Obama’s second term.
    Yes it’s worth no more than the lint in your pocket, but neither is the rest of the debt either.

  • JKB

    Well, you know the Progs are getting desperate.  Those like Krugman can see the looming disaster.

  • Danny Lemieux

    They just need to find a way to blame it on the GOP, JKB.

  • Spartacus

    Excellent question, Martel.
    I won’t pretend to see into his mind with any particular clarity, but if I had to guess, I’d say pride, ego, comfort, and adulation.  On the one hand, he could be a curmudgeonly conservative, lecturing to undergrads (most of whom couldn’t care less, as it’s not their major anyway), writing the occasional textbook, and constantly grumbling about how “What they’re doing isn’t prudent… reckless, in fact,” and generally alienating everyone else in the faculty lounge with his conservatism and gloom.
    Or, he could be… Paul Krugman, International Man of Mystery!  The elites know what song they want to hear, but they want someone of the proper class and station to sing it for them.  Nobel Prize?  That’ll do.  Vitriol and venom, and left turns so hard the elites follow each other in circular arguments trying to keep up with the spin.  Any hesitation or equivocation, and they’ll find another singer with a purer voice.  The result?  Rich royalties, famous friends, cooing coeds, posh paychecks, and his name in neon.  All for being an entertainer, and telling tales that someone will be appointed to tell anyway, so it might as well be him, right?  It may not be the truth, but… they didn’t want the truth anyway.
    Just a guess.

  • Charles Martel

    “Rich royalties, famous friends, cooing coeds, posh paychecks, and his name in neon.”
    Spartacus, a nicely turned bit of prose, that.

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  • cerumendoc

    The platinum coin is actually the start of a brilliant idea.  The concept of hard money.  The concept, unlike fiat currency, that we will have money that has intrinsic  worth.  We just need to extend this idea and actually place the proper amount of precious  metal into said coin to equal the worth of the value placed on the coin.  
    Maybe with appropriate artwork we can call the new currency the “Timmy.”

  • David Foster

    Krugman is of course correct that printing money isn’t at all inflationary as long as the economy sucks and the monetary velocity remains low (general price levels are a function not just of monetary quantity but also of velocity.)  But he’s pretty glib about how easy it will be for the Fed to “pull back much of the monetary base it created in response to the crisis.” See John Hussman for an analysis of the difficulties.

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  • Mike Devx

    Liberals believe that wealth is a zero-sum game.  This is a point you didn’t really address in your post, Book.  You focused on trade – free individuals exchanging goods for an agreed price, and on the “currency” of trade exchange, be it direct barter or coinage.
    For liberals, there is existing wealth and potential wealth, with the sum of the two being a constant forever.  Existing wealth consists of known coins, bills, precious metals in circulation.  Potential wealth are resources that can be converted into existing wealth: Natural resources that are to be exploited, the labor of men that is to be exploited, both of which are turned into existing wealth.  The sum of existing wealth and potential wealth is constant: a zero-sum game.
    In this manner of thought, the richer the United States of America is, the poorer the rest of the world must become.
    I’ve always believed that wealth can also be created practically out of thin air.  One way this occurs is via the power of the idea translated into reality.   The invention.  The mastery of the generation and transmission of electricity is one example.  The cotton gin, perhaps, as another?  Our eventual mastery of fusion power (someday) as yet another?
    You could say that via such inventions we are simply discovering more sources of potential wealth.  And I suppose that may be a reasonable argument.  But liberals constantly discount the worth of this, no matter how you frame the idea.  And I bet there are other ways to create wealth “out of thin air”.  The liberal concept that wealth is a zero-sum game, with the rich exploiters exploiting the raped exploited to accumulate their ill-gotten and undeserved wealth, is a sad commentary on the paucity of their world-view.  Take fracking – the discovery, via invention, of vast new sources of energy wealth.  A healthy response to the idea of fracking would be “Hell, yes!  And let’s make it as safe as possible!”  The liberal response to fracking is that it is, by its very nature, inherently evil, and must be stopped.  they’re not interested in managing it responsibly; no, they want it STOPPED.  And that is the difference.

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  • Freddie Sykes

    The act of increasing the money supply is inflation. The government has convinced most of us that the market’s reaction to the increase in money is inflation and muddles the situation by manipulating how it measures increases in prices.

    One of the many insidious side effects of increasing the amount of money is that it takes a while for the markets to react to this devaluation. This means that the big banks and the Fed, which have first access to this new money receive, 100% of the face value while each subsequent entity gets money with less and less purchasing power. The government and its cronies always get the best deals.

    I feel like deflation is the natural state in a free market industrial society. New products always cost more when first introduced but gradually reduce in price as the initial investments are recouped and economies of scale kick in. Deflation is the worst sort of evil for borrowers and our government is the biggest borrower of all. Hence, it has adopted a policy of planned inflation and artificial control of natural levels of interest rates. Expect the inflation defined as the market noticing the devaluation to really kick in once the Fed is no longer able to purchase the lion share of bonds. 

  • Danny Lemieux

    You are right on the mark, Freddie Sykes. The government knows that the only way out of our debt is to deflate the value of its dollars owed to debt holders (i.e., inflate the price of goods). First, however, they must line the pockets of the insider cronies with cheap money so that they can be properly hedged against the consequences of their policies. It’s no accident that Democrat presidents, bundlers and other cronies leave office as multimillionaires.
    Other countries are catching on to this. Once interest rates start climbing, as they inevitably must, then people will begin to appreciate how we have been looted.
    There have  been several articles posted recently that document how the government has been covering up the real inflation rate by playing games with the Consumer Price Index. This year will be no exception – look for very significant inflation in food prices, energy and health care. I’ve already read forecasts projecting that milk prices may double this year.

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  • Freddie Sykes

    As an independent, I would not let the codependent Republicans off the hook. For one thing, it allows you to argue the issue without assigning blame. My philosopy is Trust but Verify when dealing with Republicans and that you cannot deal with Democrats.

    Peter Schift has a good video defining deflation and showing how the government underreports the true CPI with numerous examples:

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