Monday, February 02, 2009

Blogging at its best

It's easy to find ad homiums and flame wars online. It's much harder to find reasoned debate, and rarest of all, real learning.

I once again recommend this excellent post on Interfluidity, and most importantly, the comment thread. JKH is a treasure. Key learnings for me:

1. Creating a balance sheet for a combined Treasury/Central Bank entity is very hard. The equity entry is weird -- it seems it must be negative -- and the cash entry is also strange -- it seems it must be infinitely positive.

2. People believe that a Government can print money, and also that a Government can be insolvent. To me, this is like saying a room can be both dark and lit at the same time. So long as a Government's obligations are denominated in a currency it can print, and so long as that currency is both non-convertible and floating fx, the Government can *always* meet its obligations. It has traded default risk for inflation risk.

3. Classical macroeconomists have a strong, emotional belief that a Government must issue debt, and cannot have an overdraft at its central bank, else it will inflate. The traditional reason for this was that the Government had to issue debt to drain excess reserves from the Fed, and thus support a bid (+'ve FFR). Now that the Government pays interest on reserves, that reason is gone and yet macroeconomists still fear monetizing debt. Dudes, we're already there.

4. While we've been on a fiat money system for a long time, people still believe that we're on some kind of extended gold standard. Witness the scrabbling by Nobel winning economists over what is very rudimentary operational points on the economy and money supply. The only reason Eugene Fama saying that savings create loans is worse than Paul Krugman saying stimulus is ineffective because people save it is that Paul *already* has his Nobel and Eugene just blogged his away. Serve that man a chaser to go with his pitcher of FAIL.

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