Thursday, January 29, 2009

Errors Galore

It's kind of cool living through this economic period, when it is patently clear that no one has any idea what is going on. Here is a comedy of errors to enjoy.

1) Eugene Fama -- was inline for a Nobel Prize before he before he began blogging.
Again, here is my argument in three sentences.

1. Bailouts and stimulus plans must be financed.

2. If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.

3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.

Are any of these statements incorrect?
Krugman says 2 is incorrect, and calls Fama pitiful.

Krugman, of course, is also pitiful because 1. is wrong too. But I don't have a spot in the NYTimes.

2) Jeffrey Sachs -- has an FT column, which is not that great, Nobel Prize status unknown to me. Still wrong though:
The most obvious problem with the stimulus package is that it has been turned into a fiscal piñata – with a mad scramble for candy on the floor. We seem all too eager to rectify a generation of a nation saving too little by saving even less – this time through expanding government borrowing
Government does not need to borrow to spend. Government deficit enables private savings. Therefore, to balance increased private savings, you must increase the Federal deficit. The Government can issue debt, if it wants, or it can just sit on the deficit.

3) Me! Check out the comments thread beneath the very charitable post by the indomitable Interfluidity. JKH, who does not blog but comments up a storm, and I are almost at the heart of whether a combined Government/Central Bank entity needs to borrow to spend, or not. It is clear to me that currency, whether debt or notes, is just monopoly money with an army backing it up, but JKH has a flurry of balance sheet entries, open market operations, and other highly complex jujitsu to prove me wrong. We've seen where highly complex financial jujitsu has gotten us lately so I'm feeling good, but we'll see.

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