And Nick Rowe Is the Latest Economist to Join the Inarticulate Dorks...
As he himself says: "One more for the 'inarticulate dork' pile. We all keep trying. One day we will all think it and write it clearly."
He's wrong. It is worth reading:
Worthwhile Canadian Initiative: Two extreme fiscal/monetary worlds: I want to imagine two extreme worlds…. In the first world (the "fiscal" world), all financial liabilities of the government are non-monetary liabilities, "bonds", that cannot be used as media of exchange. People use something else for money…. In the second world (the "monetary" world), all financial liabilities of the government are monetary liabilities, "money", that are used as media of exchange…. Government money may or may not pay interest…. Let's start with both worlds in equilibrium, and with balanced budgets. Now let's suppose the government wants to increase spending without increasing taxes. What happens to interest rates on government liabilities?
In the fiscal world, the government may be forced to pay a higher interest rate on government bonds to persuade people to buy more government bonds…. Unless it can persuade people to want to hold extra government bonds, the government cannot run a deficit, because it cannot sell the extra bonds.
In the monetary world, the government would never be forced to pay higher interest rate on government money to persuade people to buy more government money. It might choose to pay a higher interest rate on government money to prevent inflation, but it wouldn't be forced to…. The government can always sell the extra money and run a deficit, even if it cannot persuade anyone to want to hold the extra money. Money -- the medium of exchange -- is weird like that. People accept it, not because they want to hold it, but because they know everyone else in turn will accept it from them, even if nobody wants to hold it. Nobody ever turned down a government contract because they didn't want to hold extra government money….
The government in the first, fiscal world, might peg the rate of interest it pays on government bonds, and let the quantity of bonds it sells be demand-determined, and so the demand for government bonds in turn determines the deficit. The government in the second, monetary world, might peg the rate of interest it pays on government money. This does not mean that the quantity of money it sells is demand-determined, nor that the demand for government money determines the deficit.
The government in the first, fiscal world, has only one degree of freedom. Once it has chosen how many liabilities to sell, it cannot at the same time choose what rate of interest to pay on those liabilities. The government in the second, monetary world, has two degrees of freedom. It can choose how many liabilities to sell, and it can choose the rate of interest it pays on those liabilities.
The government in the real world is a combination…. That gives it three degrees of freedom. [i] It can choose how many liabilities to sell. [ii] It can choose what combination of liabilities to sell. [iii] And it can choose what rate of interest to pay on its monetary liabilities….
Finally, imagine a "red/green" world that is exactly like the first, fiscal world, except the government issues two types of bonds -- red bonds and green bonds… people… normally prefer holding green bonds to red bonds, so that green bonds normally yield a lower rate of interest…. [T]he total stock of bonds is determined by the government's deficit, but the stock of green bonds that people hold (or the mix of green vs red bonds) is demand-determined at that rate of interest chosen by the central bond bank. The government has only two degrees of freedom in the red/green world.
The real world is NOT like the red/green world. Too many economists, of all persuasions, think it is.
One more for the "inarticulate dork" pile. We all keep trying. One day we will all think it and write it clearly.
This was a bit rushed. I gotta go.
