Thursday, August 18, 2011

Econ in 3 words, short addendum

Beating this to death, the second, and not the last time. It's important, because many web-MMTers succumb to a kind of magical thinking, thinking of fiat money, government issued currency as something new, magical, separate, conferring powers on a governments that they do not have. I argued with one who insisted that having a floating fiat currency made any debt repayable, not just nominal debts in the domestic currency. Even if the debt was denominated in a foreign currency!! Others insist that fiat money is not debt, or that "MMT" does not say so.

Fiat money is just what money always was, without bells & whistles that usually impaired its economic function (& but oh-so-incidentally helped make the rich richer). Thinking of currency issuance as something unique to governments, a difference in kind, is a step toward the false misunderstanding of Chartalism as about "legal tender". (Somewhat due to Schumpeter's bad expositions, and to von Mises' complete incomprehension of what people like Knapp were saying.)

For most of the twentieth century, the understanding of money of ordinary blokes like Thomas Edison & Franklin D. Roosevelt - and the millions who listened to them - was far superior to that of modern mainstream economists, and the populations they have infected. As far advanced as a grade schooler who learnt about astronomy in modern grade school - is beyond the most learned medieval astrologer. Most people, particularly most "economists", since the "retrogression of economic knowledge since the 1970s" (Ingham) or the "dark age of macroeconomics" (Krugman) wrongly separate in their mind 3 things. (Krugman himself is somewhat in the dark ages, infected by the preposterous idea that printing currency-money-zero maturity bond debt is superinflationary compared to printing greater quantities of bond - timed maturity money -debt!)

The 3 things:

1) Debt, obligations - understood as "I owe that guy a favor" "I owe my parents something for taking care of me as a child". Obligations -Understood in the most intuitive, immediate, abstract way.

2) Money, particularly fiat money

3) Financial debt, like government bonds, like credit card debt.

These are all the same thing. The last two are instances of the first, the most general and most important. All they are - all money, bonds, financial assets are - is denominating, standardizing, linearizing, dating and measuring the first thing. Imagine a tribe of chimps that is keeping scores on who owes who which favors. And this system keeping track of favors owed is usually supervised by the #1 Chimp - the Great Chimp.

That's us. That's what a monetary system is. The Great Chimp is the government. Banks are his assistant chimps. The basic money is the favors owed to ordinary chimps by the Great Chimp.