Stock Market Commentary for January 4, 2013

Stocks closed mildly in the green today as the S&P 500 flirted with the upper number of my monthly target for January.  The good news event of the day that was tagged as the reason for today’s modest rally was the jobs report number that came in right at Street expectations. The top story on Yahoo Finance this morning described it as a “Goldilocks” number.  The theory is that if the number was lower, it would indicate a worsening economy, and if the number was higher it would be a sign of a strengthening economy and the Fed would be forced to raise interest rates as a result. But today’s number was “just right.”

Maybe it’s just right in the land of mainstream financial media, but not in my book. And if you ask any of the millions of people without a job, my guess is that the level of job creation wasn’t quite enough to put a smile on their face.

But that’s just my guess.

The big financial story of the day was splashed across the headlines everywhere, including Business Insider, which – out of the billions of websites globally – is ranked #352 by Alexa, and Huffington Post, which is ranked #84. The story is that a solution for the debt ceiling problem would be the issuance of a single trillion dollar coin.

Here’s how it looked on Business Insider:

$Trillion coin “solution”

And here is how it looked on Huffington Post:

$Trillion platinum “solution”

Let me explain this proposal in straightforward, old-fashioned terms (you know, terms that actually describe something accurately, none of this “taxes going up = tax cut” terminology).

The United States has currently reached its limit on the amount it is authorized to borrow, known as the “debt ceiling.” Since the “deal” just reached did not address the debt ceiling, a new battle over raising the limit will have to be “fought.” This trillion dollar “solution” concerns the minting of a “trillion dollar platinum coin”. Under section K of Federal law, the Treasury Secretary appears to figuratively have a blank check on the design and issuance of platinum coins.

The Treasury normally writes checks against the money it collects from taxes. When the tax money runs out, the Treasury borrows money in the form of bonds in order to continue to write checks. However, that borrowing can run up against the debt ceiling, at which point the Treasury cannot (according to the law, anyway) continue to go further into debt. Whether or not to continue to spend like a drunken sailor results in the looming political confrontation.

The “trillion dollar coin” theory puts forth the idea that Geithner should authorize the creation of a platinum coin with a face value of one trillion dollars, deposit it at the New York Fed, and then write checks against it, rather than “going deeper into debt” by selling more bonds (which as of right now is not authorized by law – debt ceiling). Under this theory, the U.S. Government would not be “going into debt” because it would be borrowing against cash on deposit with the Fed.

This is idiotic on several levels.

First, if you or I have $100,000 on deposit in the bank, and go into the bank to borrow against that $100,000, at any point in the future we can just tell the bank to pay off the loan using the deposit.

Does anyone really believe that the Treasury can just tell the Fed to pay off the trillion with the single platinum coin?

Second, if this is a genuine plan, let’s make the face value of the coin $16 trillion so we can pay off all our debt, or better yet, $120 trillion, so we can fund our unfunded liabilities, or maybe $500 trillion so we can leave a nice little inheritance to our children instead of a mountain of debt coming due.

Isn’t creating money fun!!!

I’m not saying that this proposal wouldn’t provide a “legal loophole” to the debt ceiling. What I am saying is that it isn’t a solution to the underlying fiscal problem, nor is it a viable way to “save the economy” as put forth in the headline by Business Insider.

Von Mises was correct: it’s not possible to create everlasting prosperity through monetary debasement. It only brings about economic disaster, not utopia. You cannot print your way to prosperity anymore than you can drink your way sober by consuming another bottle of whiskey.

For what it’s worth, President Kennedy tried to have the Treasury continue to create money (Silver Certificates issued by the United States Treasury instead of Federal Reserve Notes) under executive order 11110. He wasn’t successful and met an early demise to that idea.

This plan featured in the news today would be a nice little loophole to avoid a “battle” between Republicrats and Demoicans, not that there are any fiscal differences between the two parties, but it’s NOT going to “save the economy” nor get us off the path of currency debasement leading to systemic failure. It would keep us firmly planted on that road.

Have a great weekend.



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