mercredi 8 avril 2015
Can a Sovereign Currency Issuer Default?
Posted on 16:06 by nice news
There’s an interesting discussion going on about inflation as another form of default. Brad Delong and Noah Smith both say that Modern Monetary Theory is wrong to argue that inflation isn’t another form of default (you can read their full posts here and here). In essence, they say that the markets can dictate that a government is bankrupt even if it isn’t technically or legally bankrupt. I tend to agree with them and I’ve had some rather long and drawn out battles with the MMT people over the years about this exact topic. I remain convinced that MMT overreaches at times when emphasizing the importance of a government being able to create money and the state’s ability to attribute “value” to money. In fact, I’d argue that the MMT operational description is misleading and overemphasizes the idea that the sovereign currency issuer “spends first”. Although a sovereign currency issuer can’t be forced into a legal default, this does not mean their liabilities are always considered creditworthy.
Here’s how I think of this. Money creation is truly endogenous. We can all create money from nothing. If I go to a bank for a loan I am essentially creating a financial liability that the bank may or may not want to hold. If the bank considers me to be creditworthy they will accept my liabilities. When the loan is created the bank is holding an asset (the loan) and a liability (the deposit). Likewise, I am holding an asset (the deposit) and a liability (the loan). We tend to think of the bank as “creating” the money, but you could also think of the borrower as creating the loan. For all practical purposes, we are both willing to hold eachother’s liabilities. This is the essence of “money” creation. When someone is willing to hold your liabilities you have “credit”. And money is ultimately credit, which comes from the Latin word credere meaning to believe. But you must have credit first. Credit does not merely come from legal
Here’s how I think of this. Money creation is truly endogenous. We can all create money from nothing. If I go to a bank for a loan I am essentially creating a financial liability that the bank may or may not want to hold. If the bank considers me to be creditworthy they will accept my liabilities. When the loan is created the bank is holding an asset (the loan) and a liability (the deposit). Likewise, I am holding an asset (the deposit) and a liability (the loan). We tend to think of the bank as “creating” the money, but you could also think of the borrower as creating the loan. For all practical purposes, we are both willing to hold eachother’s liabilities. This is the essence of “money” creation. When someone is willing to hold your liabilities you have “credit”. And money is ultimately credit, which comes from the Latin word credere meaning to believe. But you must have credit first. Credit does not merely come from legal
Can a Sovereign Currency Issuer Default?
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