When you say "The government cannot default on its debts because it can create money. Its only restrictions are full employment and inflation" you're talking about the US, right? It's the global reserve currency so doesn't have the same worries as others but Canada is not in the same boat and there have been several countries that have defaulted on their debts, Argentina being a good example.
Any nation state. The whole point of a nation state is it gets to make it's own currency the only exception is Vatican city and the EU, and they are both experiments that don't work.
Argentina had defaulted on foreign exchange reserves, not their currency debt, that's something different, even though they did steal resources from the private sector and spent way too much which caused inflation.
What this is talking about is, rvery dollar in circulation exists because government created a debt. If it defaulted on sovereign debt then there would be no money. But To talk about them or Venezuela or 30s Germany would be a lengthy topic in why they are the exception IMHO
The entire system relies on controlling inflation though, right? Sure, the government can keep printing money, but if inflation isn't kept in check then borrowers will either balk at buying new bonds or demand crippling interest rates from any new issuances.
As I mentioned in my response to Daniel below, I just don't trust the government to act responsibly. Or, if you'd prefer to look at it from another perspective, voters would demand more an more "free" stuff but refuse to pay higher taxes to keep inflation under control.
Yes, like I said it's the only restriction. Business prefers a stable monetary environment and high inflation discourages business, as well as devaluing labor.
Central banks were supposed to be the independent third party that weren't suseptable to political Influence, which is why they act as an intermediary, but it's obvious that the arms length neutrality is fucked
I enjoyed it too. I see a few places where I really need to get a better understanding so I can either articulate what I'm saying better, or retool what I know to match reality better.
As for the writing, you're clear and easy to read. everything else is just style.
I cannot tell a lie—I enjoyed your post. Your historical facts are truthful (as far as they go). Your explanation of inflation is spot on (if we assume a closed system). You have essentially made a case for Modern Monetary Theory (MMT). I am not a fan of MMT, but I don’t deny its appeal.
My issue with your post has nothing to do with your monetary or fiscal theory. I take issue with your explanation of housing prices and the coming diasporas.
First, housing is no different than any other good. The law of supply and demand is controlling. As long as there is aggregate demand for a product its quantity will cause its price to rise or fall. Fewer houses will cause housing prices to rise or remain high; increasing the housing supply will cause prices to fall.
When government intervention (building regulations and codes) makes building more housing more expensive or causes delays or both, capital will chase other investment opportunities in other industries.
This is not to say that your story is wrong. As things currently stand, it explains the status quo in both Canada and the USA. But it isn’t the whole story.
If you survey the USA, you will find less regulated markets where housing is affordable to the current generation of twenty-something-year olds (I know this because my 25-year old son bought a house last year). The problem that can’t be denied is that there isn’t enough or any new housing being constructed in areas where most people want to live and work.
But the effect—low housing—is not caused by government’s monetary policy; it’s caused by government’s stranglehold over housing. (See Bryan Caplan’s Build Baby Build for a world class analysis of housing)
Finally, the diaspora of immigrants taking away jobs and draining welfare benefits is untrue. What happens when 1,000,000 people visit the U.S. or Canada? They spend their money in the local economy. The same thing happens when immigration causes the population to rise with new workers (who are also consumers).
Say’s law holds that supply creates demand. This means that the act of producing goods and services generates the income needed to purchase those goods and services, thus creating demand.
Example: If a factory starts producing more widgets, the workers who make the widgets will earn more money. They will then use that extra money to buy more goods and services, either from the factory itself or from other businesses. This increase in spending will then stimulate demand in other sectors of the economy.
Immigration is a self-fulfilling prophesy. More workers and consumers will benefit the economy and raise GDP.
I will conclude my remarks by suggesting that anyone who objects to my economic analysis should read Henry Hazlitt’s Economics in One Lesson. If after reading Hazlitt you are hungry for a more detailed and comprehensive economic discussion, read my hero, Thomas Sowell: Basic Economics.
I’m not a fan of MMT either. Aside from the fact that it seems to argue that there are no consequences (yes, I know that’s simplistic), for it to work, for inflation to be controlled, MMT replies on the government to do its job. Or more precisely, to act responsibly. As we see annually with the debt ceiling battles, this is unlikely to happen.
In the US (probably everywhere) what I would expect to see from an adoption of MMT is runaway spending with no changes (at best) to tax policies. So, runaway inflation if I understand the economics correctly (which I may not).
As for housing, as you know my beliefs are more closely aligned with those of Rian than with yours. If not enough houses are being built then mass immigration is a mistake (it's always a mistake but in this case we're just talking about supply and demand). Temporary emergencies require temporary measures. Again, something that you and I do not agree on.
You would have little charm if you and I were in lockstep on all subjects.
PS—Beware of “temporary” emergencies. In America that led the way to the welfare state (unemployment insurance, social security “benefits”, Medicare/Medicaid, TANF, SSI, SNAP, WIC, Section 8, Public Housing, etc.)
First, I'm Canadian. We imported ten million people and build 80k houses.
When you say "The government cannot default on its debts because it can create money. Its only restrictions are full employment and inflation" you're talking about the US, right? It's the global reserve currency so doesn't have the same worries as others but Canada is not in the same boat and there have been several countries that have defaulted on their debts, Argentina being a good example.
Any nation state. The whole point of a nation state is it gets to make it's own currency the only exception is Vatican city and the EU, and they are both experiments that don't work.
Argentina had defaulted on foreign exchange reserves, not their currency debt, that's something different, even though they did steal resources from the private sector and spent way too much which caused inflation.
What this is talking about is, rvery dollar in circulation exists because government created a debt. If it defaulted on sovereign debt then there would be no money. But To talk about them or Venezuela or 30s Germany would be a lengthy topic in why they are the exception IMHO
The entire system relies on controlling inflation though, right? Sure, the government can keep printing money, but if inflation isn't kept in check then borrowers will either balk at buying new bonds or demand crippling interest rates from any new issuances.
As I mentioned in my response to Daniel below, I just don't trust the government to act responsibly. Or, if you'd prefer to look at it from another perspective, voters would demand more an more "free" stuff but refuse to pay higher taxes to keep inflation under control.
Yes, like I said it's the only restriction. Business prefers a stable monetary environment and high inflation discourages business, as well as devaluing labor.
Central banks were supposed to be the independent third party that weren't suseptable to political Influence, which is why they act as an intermediary, but it's obvious that the arms length neutrality is fucked
Thanks for humoring my questions. Great article by the way. You make me feel like I write in big block letters using crayons. ;)
I enjoyed it too. I see a few places where I really need to get a better understanding so I can either articulate what I'm saying better, or retool what I know to match reality better.
As for the writing, you're clear and easy to read. everything else is just style.
I cannot tell a lie—I enjoyed your post. Your historical facts are truthful (as far as they go). Your explanation of inflation is spot on (if we assume a closed system). You have essentially made a case for Modern Monetary Theory (MMT). I am not a fan of MMT, but I don’t deny its appeal.
My issue with your post has nothing to do with your monetary or fiscal theory. I take issue with your explanation of housing prices and the coming diasporas.
First, housing is no different than any other good. The law of supply and demand is controlling. As long as there is aggregate demand for a product its quantity will cause its price to rise or fall. Fewer houses will cause housing prices to rise or remain high; increasing the housing supply will cause prices to fall.
When government intervention (building regulations and codes) makes building more housing more expensive or causes delays or both, capital will chase other investment opportunities in other industries.
This is not to say that your story is wrong. As things currently stand, it explains the status quo in both Canada and the USA. But it isn’t the whole story.
If you survey the USA, you will find less regulated markets where housing is affordable to the current generation of twenty-something-year olds (I know this because my 25-year old son bought a house last year). The problem that can’t be denied is that there isn’t enough or any new housing being constructed in areas where most people want to live and work.
But the effect—low housing—is not caused by government’s monetary policy; it’s caused by government’s stranglehold over housing. (See Bryan Caplan’s Build Baby Build for a world class analysis of housing)
Finally, the diaspora of immigrants taking away jobs and draining welfare benefits is untrue. What happens when 1,000,000 people visit the U.S. or Canada? They spend their money in the local economy. The same thing happens when immigration causes the population to rise with new workers (who are also consumers).
Say’s law holds that supply creates demand. This means that the act of producing goods and services generates the income needed to purchase those goods and services, thus creating demand.
Example: If a factory starts producing more widgets, the workers who make the widgets will earn more money. They will then use that extra money to buy more goods and services, either from the factory itself or from other businesses. This increase in spending will then stimulate demand in other sectors of the economy.
Immigration is a self-fulfilling prophesy. More workers and consumers will benefit the economy and raise GDP.
I will conclude my remarks by suggesting that anyone who objects to my economic analysis should read Henry Hazlitt’s Economics in One Lesson. If after reading Hazlitt you are hungry for a more detailed and comprehensive economic discussion, read my hero, Thomas Sowell: Basic Economics.
I’m not a fan of MMT either. Aside from the fact that it seems to argue that there are no consequences (yes, I know that’s simplistic), for it to work, for inflation to be controlled, MMT replies on the government to do its job. Or more precisely, to act responsibly. As we see annually with the debt ceiling battles, this is unlikely to happen.
In the US (probably everywhere) what I would expect to see from an adoption of MMT is runaway spending with no changes (at best) to tax policies. So, runaway inflation if I understand the economics correctly (which I may not).
As for housing, as you know my beliefs are more closely aligned with those of Rian than with yours. If not enough houses are being built then mass immigration is a mistake (it's always a mistake but in this case we're just talking about supply and demand). Temporary emergencies require temporary measures. Again, something that you and I do not agree on.
You would have little charm if you and I were in lockstep on all subjects.
PS—Beware of “temporary” emergencies. In America that led the way to the welfare state (unemployment insurance, social security “benefits”, Medicare/Medicaid, TANF, SSI, SNAP, WIC, Section 8, Public Housing, etc.)
Wait, so does this essay prove the Keynesian Counter Cyclical approach is a good thing or a bad thing? Or am I off base here?