Chicago Fed President Goolsbee wants to declare pennies nickels

A recent comment by Chicago Federal Reserve President Austan Goolsbee gives you a glimpse into how Fed people think and helps to explain exactly why you're paying more for everything.

It's almost as if inflating was hardwired into Fed members' brains.

Goolsbee recently sat down with Illinois Treasurer Mike Frerichs during the National Association of State Treasurers conference in Chicago. In the course of the conversation, the subject of pennies came up. 

There are a lot of people who think the U.S. Treasury should do away with the penny. This would make sense financially. It costs about 3 cents to mint the 1-cent coin. 

“How stupid do you need to be to mint money at a loss?” Goolsbee asked.

But there are about 250 billion pennies in circulation. That's about $2.5 billion in pennies.

So, if we're doing away with pennies, what happens to all those coins?

Goolsbee thinks we should wave a magic wand and declare pennies are all worth 5 cents. 

“Pennies just become nickels,” Goolsbee said.

Well, OK then! 

While we're at it, can we declare dollar bills are worth a hundred?

This (bizarre) plan is apparently based on an idea presented by a Chicago Fed economist. He said there should be a "voluntary, universal declaration" that pennies are worth 5 cents.

I'm not even sure what that means, much less how it would work. It seems to imply there would be no government edict. Everybody would just agree, and voila.

Logistics aside, this idea shows you exactly how Fed people think. Money is created on a whim. It exists by decree. If we need more money, well, just say the word and "poof" -- we have more money.

This is just a scaled-down version of the $1 trillion coin.

It's also pretty much how quantitative easing works. 

In a QE operation, the Federal Reserve buys securities (primarily U.S. Treasuries and mortgage-backed securities) on the open market with money created out of thin air. This is sometimes referred to as "money printing." Of course, the Fed isn't running off $100 bills in the basement of the Eccles Building. It's more like using a debit card when no money is in the account. With a few keystrokes, the central bankers at the Fed transfer money that never existed until that moment to a bank or financial institution in return for securities.

Money creation is, by definition, inflation. One symptom of monetary inflation is rising consumer prices - price inflation.

This is what the Fed does.

And this is how Fed people think. 

This thought process is a natural byproduct of a fiat money system. Money can be created on a whim. Governments love this kind of system because it enables government borrowing and spending far beyond anything possible in a sound money system. Fiat money drives big government!

As I talked about recently, inflation is the Fed's stated policy. It's on purpose. So, I suppose it's not surprising that a Fed president would think declaring pennies are nickels is a great idea.

But from a normal person's perspective, think about the inflationary impact of the move. Instead of $2.5 billion in pennies, we would suddenly have $12.5 billion in pennies.

Now, if you have a bunch of pennies lying around, this might seem like a good idea on the surface. You could buy more with your pennies. But so could everybody else. The bidding war would drive up prices, and you wouldn't be any better off.

This is exactly how monetary inflation works, but on a much larger scale.

Of course, the penny plan pales in comparison to the $5 trillion the Federal Reserve created out of thin air running QE during the pandemic. But Goolsbee's flippant attitude about creating more money is indicative of the root of the problem.

And it is exactly why you should never expect price inflation to go away. They don't want it to go away. They just hope you don't notice.