Billyjoe...I tried to make it clear that the dollar bills were created as a liability on the Fed balance sheet...that means the Gov't owes something with regard to the Dollars...they back up that obligation by protecting the credit of thier longer term debt. When the longer debt has no credibility, when third parties, not the Fed, refuse to buy the longer debt, then the demand debt, the cash, will cease to have value. That is what happened in Weimar. That is what happened in Zimbabwe. You cannot just print money and expect people to use it for value when no one will buy your longer term debt. It is the longer term debt that gives credibility to your cash. This is what the Fed is screwing with when it buys 90% of the new issuance of Treasuries. If the consensus evolves that there is no real third party demand for Treasuries then we will have a serious problem.
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All money is created out of debt? -or not?
- Thread starter Newmoney24
- Start date
Trefoil, demand for credit is created by perception that ROI is possible. You are right that credit formation is demand driven, but it is not the kind of aggregate demand that keynesians focus on...it is demand for credit to take risk...this essentially a supply creation system...taking risk, borrowing money, because you are convinced in the fiscal context that you can possess an ROI sufficient to justify the risk of borrowing...this is demand driven by fiscal policy and it cannot be created by monetary manipulation.
Quote from Ed Breen:
Trefoil, demand for credit is created by perception that ROI is possible. You are right that credit formation is demand driven, but it is not the kind of aggregate demand that keynesians focus on...it is demand for credit to take risk...this essentially a supply creation system...taking risk, borrowing money, because you are convinced in the fiscal context that you can possess an ROI sufficient to justify the risk of borrowing...this is demand driven by fiscal policy and it cannot be created by monetary manipulation.
Keynes was all about risk. What do you think he meant when he said "animal spirits"? He was always emphasizing that businessmen are looking at the future, not the past.
Demand driven by fiscal policy is 100% Keynes. Monetary manipulation is Friedman. The former works, the latter is a bunch of crap.
Quote from Ed Breen:
Billyjoe...I tried to make it clear that the dollar bills were created as a liability on the Fed balance sheet...that means the Gov't owes something with regard to the Dollars...they back up that obligation by protecting the credit of thier longer term debt. When the longer debt has no credibility, when third parties, not the Fed, refuse to buy the longer debt, then the demand debt, the cash, will cease to have value. That is what happened in Weimar. That is what happened in Zimbabwe. You cannot just print money and expect people to use it for value when no one will buy your longer term debt. It is the longer term debt that gives credibility to your cash. This is what the Fed is screwing with when it buys 90% of the new issuance of Treasuries. If the consensus evolves that there is no real third party demand for Treasuries then we will have a serious problem.
Those are two different activities, like practicing tennis and playing a match. There may be an empirical relationship between them, but that is not to say that one is created out of the other, like a cake out of flour.
Billyjoerob, the point is that dollars are created by the Fed as the demand debt of the U.S. government. Dollars are used in exchange for value because of law and the credibility of the Government. That credibility is measured by the governments long term debt. The dollar, non-interest bearing demand debt, is related to the longer term debt that bears interest in terms of a yeild curve...from zero demand debt to 30 year debt...its all debt, the difference is that non interest bearing demand debt is used in exchange as money and longer term debt is used as investment, savings. As the interest rates on longer term debt approach zero, the longer term debt also begins to be used as money, becuase it has little investment value, it becomes a short term storage space for uninvested liquidity...the biggest such storage space is in excess reserves at the Fed.
Trefoil, I don't think you understand that when I am talking about the demand for credit being fiscally driven, I am implying a fiscal context that favors production. It is the Keynesian aggregate demand theory mistake that has created a fiscal context that treats consumption and production as the same thing. Think about the economic view that allows you to create a system where you tax reinvested profit twice, or at the highest marginal rate, while at the same time you can deduct the cost of invested debt.