I learned a lot about financial crises from Gary Gorton's work in the area. His views on what went wrong during the recent crisis and what might be done to prevent similar events are views that should be taken seriously. Seriously, that is, but not uncritically. And this is where George Selgin provides a useful service: see Misunderstanding Financial History.
David, very educational blog. I have a question: why does the citizens of a country need to pay federal income tax when the gov claims it can create new money for the purpose of funding its own debt?
ReplyDeleteMy understanding is that money is backed by debt, debt is backed by taxes, and taxes are paid in money. Similar to the three intermingle arrows of a recycling symbol. If we print to fund and its all ok, seems like you wont need the taxpayer portion of the model.
The short answer is that in most cases, printing money to finance spending is inflationary (the inflation tax). There is no free lunch.
DeleteThanks. I along with many others have suspected that at a time when we print to fund, inflation is afoot and the cpi ppi official metrics are rigged to reflect what is politically feasible rather than reality. I bet inflation is a long process, lasting far beyond the single event or catalyst that causes it.
DeleteWhat makes you think that CPI measures are "rigged" in the U.S.? The basket of goods and services that goes into calculating CPI is publicly available, as are the weights for each good and service. You can go look at the data yourself and construct the index yourself. If you don't trust the measures for the individual goods and services, you can try to measure them yourself as well. I'd be interested to see what you come up with.
DeleteI have a further question. I hear a lot about how debt money, as a concept, is doomed to fail via its own mechanics. By that I mean a specific quantity of money is created and loaned at interest, yet no money is created that would satisfy the interest payment.
ReplyDeleteThis criticism seems valid to me, but I would like your take.
An interest rate would exist even in a world without money (it would be called the real rate of interest). So, suppose I borrow one beer from you today, and promise to repay 2 beers tomorrow. Is this system doomed to failure?
DeleteI am thinking that an unfair answer because beers can be created new by any member of society. It would only be limited to natures constraints.
DeleteBut money creation is only given to one group currently. Thus the difference.
If there was only one beer maker, who had not yet made any with which we made that oath of debt, yes its doomed by its own mechanics.
Wink...but it might be a great deal for the beer debtor, as there is no way he can pay his debt but he received his one beer already.
Thanks for the response.
Any person is free to issue their own personal IOU and hope that it circulates as currency. (Most such notes will not circulate, and for obvious reasons.)
DeleteFor a money-issuer whose notes (or liabilities) do circulate (e.g., central and chartered banks), interest on note-issue can be paid out of profit. If profit is lacking, the notes will dilute in value (there will be an inflation).
Interesting. Ive never considered a personal level iou issuance paper, as a concept.
DeleteIf I could pay my taxes in such a paper, and dilute it after issuance, I'd be golden.
And yes, if there is no profit at the institutional issuer, paper value dilutes via the need to print to pay interest. If there was some other reason causing dilution besides to need for a cash flow negative entity to pay interest, I can think of what it is. It also sorta assumes the paper is always accepted, which may not be the case.
Mr andolfatto, have a great weekend!
Personal IOUs have a long history of circulating as payment instruments. Consider this quote:
DeleteFor example, Bodenhorn (1993) quotes an Italian General Secretary of the Banco D’Italia how, prior to 1874, “everyone was issuing notes, even individuals and commercial firms; the country was overrun with
little notes of 50, 25, and 20 centimes issued by everyone who liked to do so.”
Have a nice weekend, anonymous.
No response to either question....u must be a busy guy.
ReplyDeleteYou have no idea.
DeleteI can sympathize. Thank you for your responses.
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