tag:blogger.com,1999:blog-2499715909956774229.post1833321914908935138..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: The Fed's Balance SheetStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-2499715909956774229.post-12096347686980034352010-04-29T11:24:25.023-07:002010-04-29T11:24:25.023-07:00Here's my take on it. Just think of the centra...Here's my take on it. Just think of the central bank as another financial intermediary, except we give it a monopoly on the issue of particular kinds of circulating liabilities (the monopoly is explicit in most countries, but not in the US). Those liabilities are not explicit promises to future payoffs, but they are typically (i.e. not right now) backed by obligations of the the fiscal arm of the government. Thus, depending on the commitments of the government to its central bank, outside money is backed by the power of the government to tax.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-91277814699337326062010-04-28T19:52:26.635-07:002010-04-28T19:52:26.635-07:00That would put you at odds with Scott Sumner, Nick...That would put you at odds with Scott Sumner, Nick Rowe, Bill Woolsey, etc., who all claim the dollar is fiat money. Nick was the most explicit about it, in his "Why Do Central Banks Have Assets?", where he denied that assets matter.<br /><br />My theoretical construct says that fiat money would create a free lunch for its issuer, which attracts rival moneys, which would reduce the value of the so-called fiat money to zero. The fiat money just can't get off the ground.<br /><br />I think of it this way: A landowner collects rent in silver. He buys groceries by issuing silver IOU's, which he accepts for rent. His IOU's circulate as money, even though he never pays actual silver for them. He can then designate his kitchen as his central bank. His bank issues more silver IOU's, and uses them to buy bonds that he himself issued sometime earlier. All this does is replace one of his liabilities (bonds) with another (silver IOU's). Sounds like a good description of the US dollar to me, and there's no need for this implausible stuff called fiat money.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-1487401682196089662010-04-27T18:47:50.426-07:002010-04-27T18:47:50.426-07:00Yes, I learned about the backing theory of money w...Yes, I learned about the backing theory of money when Sargent and Wallace were thinking about it in the early 80s. Fiat money is a theoretical construct. In practice, the outside money issued by the Fed is not that thing at all, but could be under a particular operating rule.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-29410991538246399522010-04-26T09:26:26.089-07:002010-04-26T09:26:26.089-07:00Stephen:
That's interesting. You sound like y...Stephen:<br /><br />That's interesting. You sound like you might subscribe to what I call the backing theory of money, which holds that money is valued on the same principles as any other liability. If so, welcome to the (very small) club!<br /><br />I wonder if you'd also agree that there is no such thing as fiat money, in the sense that all money is actually backed by the assets of its issuer.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-47522738591682958342010-04-25T15:25:57.860-07:002010-04-25T15:25:57.860-07:00Yes, exactly. Essentially fiscal policy matters - ...Yes, exactly. Essentially fiscal policy matters - it's important to think about the consolidated balance sheet of the fiscal authority and the central bank.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-40489538128137855892010-04-23T07:41:16.208-07:002010-04-23T07:41:16.208-07:00I would add that as long as the Fed only issues $1...I would add that as long as the Fed only issues $100 to people who offer $100 of bonds in exchange, the Fed is always in a position to use its bonds to buy back all the dollars it has issued. Compare that to the case where the Fed simply helicopter drops dollars. The Fed is then incapable of buying back its dollars. <br /><br />The helicopter drop is inflationary. The open market purchase of bonds is not.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.com