We should all be grateful to James Dorn, Editor of the Cato Journal, for his inspiring letter in the Financial Times on 4th September. This explained something that no one had hitherto worked out, namely that excessive money printing a la Mugabwe leads to inflation. He deserves a Nobel Prize for that.
Of course another explanation for the above letter is that the Cato Institute is a mouthpiece for the Koch brothers: the latter have donated $30m to the institute over the years. And rich people just cannot stand the idea of government printing money and distributing it to poor people so as to raise demand and revive the economy. Oh, but I'm being too cynical.
My sources in the Cato Institute tell me that this institute will shortly be making two further state of the art, paradigm changing revelations. One is that water is wet. And the other is that grass is green.
Don’t you just love American right wing crazies?
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This question relates to a quote of yours:
ReplyDelete"It is true that when the central bank buys debt, the money supply rises: the CB prints new money to buy the debt. As to Murphy’s assumption that the effect is inflationary, that assumption is extremely questionable, first for a theoretical reason. This is that the fact of the CB buying debt does not increase private sector assets. It just changes their nature or composition."
Just to be clear, the nature or composition of what, is changed? Do you mean fed fiat money is swapped for government treasuries? Also, if private sector assets are not increased, then what was the point of buying the debt? That is, if the process does not put money into the private economy what is its function? After all, government debt is private saving, not only that, but the entire money supply... So if deficit spending is not getting cash into the private sector, what is?
"That is, monetary base and government debt are very similar in nature, thus the effect of swapping one for the other is minimal..."
The effect of the swap itself is minimal, but is it really the swap that matters? Isn't it more the fact both were created out of nowhere one step earlier and now represent new fiat demand in economy that matters?
Thank you,
Lyndon
Lyndon,
DeleteRe your question: “the nature or composition of what, is changed?” the answer is actually at the end of the preceding sentence in the above quote. I.e. the answer is “private sector assets”.
Next “Do you mean fed fiat money is swapped for government treasuries?” the answer is “yes”.
Next “if private sector assets are not increased, then what was the point of buying the debt?” You might well ask. The consensus of opinion (which I agree with) is that QE has SOME EFFECT, but it is not a dramatic effect.
Re “So if deficit spending is not getting cash into the private sector, what is?”. The answer is that a deficit can accumulate EITHER as increased debt OR as increased money supply (monetary base to be exact). I.e. if government borrows and spends, the deficit accumulates as debt. But if the central bank immediately QEs the debt, then the deficit accumulates as extra money in the hands of the private sector.
Re your last sentence, I think you are saying that increasing private sector net assets has more effect than swapping one form of asset for another (as under QE). If so, I agree.
Ralph