Arnold Kling  

Money, Inflation and Debt

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The Future of Finance... I Can Only Sputter...

An excellent podcast, featuring Jeffrey Rogers Hummel. He argues that there is not enough tax revenue available from seignorage for governments to inflate their way out of their debts. Because of financial innovation and money substitutes, it would take hyperinflation to use money printing to finance large deficits. Hummel says that of all the bad choices the U.S. government would face in a financial crisis, a formal default will be preferable.

Toward the end, he says that the Fed has shifted from monetary policy to credit allocation, and that this is "the new central planning." That sounds a bit strong to me, but listen for yourself.


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COMMENTS (11 to date)
Mike Sproul writes:

There is no such thing as seignorage, hence no tax revenue to be gained by issuing more money. In the 1800's, when private banks issued paper money, they routinely stated that they earned no profit (seignorage) by issuing paper money, as the printing and handling costs burned up more than the interest the bank earned on its assets. Paper money was issued mostly as a form of advertising by the bank.

If private banks earned no seignorage, what makes you think central banks do?

Ted writes:

What monetary policy can really do to alleviate the government's debt problem has really nothing to do with seigniorage.

Michael Woodford's Neo-Wicksellian model is, in fact, cashless and you can still generate functioning monetary policy quite easily since the central bank can still manipulate a short-term nominal interest rate disconnected from the actually demand or supply for money. So, monetary policy need not lose any traction in a money-less world. However, it does mean seigniorage revenue goes to zero. But that's kind of beside the point. If you can still control the price level, you can ease the fiscal situation easily. Much of outstanding government debt is nominal, so as long as central bank can move the price level it can substantially alleviate a fiscal situation since inflation-adjusted debt is more easily payable by traditional revenue sources.

Although, I would contend it is possible that investors may internalize this and begin to demand inflation-protected bonds. In which case, then we are truly powerless.

Badger writes:

"investors may internalize this and begin to demand inflation-protected bonds"

That's exactly how all hyperinflationary economies of the last half century got into hyperinflationary addiction. It has happened before, it will probably happen again. In reality, politically speaking, it's quite easy for any country to get into it, particularly when the central bank isn't a supranational institution.

A debt default or moratorium, on the other hand, is probably a good recipe for severe domestic and international political instability. In politics, it's never too easy to promote such huge in-the-open wealth transfers without creating dangerous unrest. That's why hyperinflation is so much more palatable to politicians.

Zdn writes:

"If private banks earned no seignorage, what makes you think central banks do?"

Because it costs less than $100 to print a $100 bill. Equating the Federal reserve printing money today with small private banks doing the same in the 1800's...I hope you were joking.

ThomasL writes:

@Mike Sproul

At the very least, legal tender laws.

ThomasL writes:

I might also mention that Hummel, at least to a limited degree, agrees. He explicitly stated that seignorage, for various reasons, was unlikely to be sufficiently profitable to be a solution--hence why he finds a default more likely than high inflation.

FWIW, I thought the last five minutes or so, on the role of the Fed, was the most interesting part of the whole [interesting] podcast. Two thumbs up.

Mike Sproul writes:

Zdn:
"Because it costs less than $100 to print a $100 bill. Equating the Federal reserve printing money today with small private banks doing the same in the 1800's...I hope you were joking."

It costs a little over 2 cents to print a dollar bill, and not much more for a $100 bill. They last a little over 2 years. That's just printing costs. Now add in handling costs, costs of chasing counterfeiters, and you have reason to doubt that paper money is profitable to either private or public banks. Seignorage, if it existed, would give a free lunch to the issuing bank. This would attract rival moneys, until the seignorage was competed to zero.

ThomasL
"At the very least, legal tender laws."

Continental dollars and Assignats were legal tender, as were all the other hyperinflated currencies I've ever heard of. Those laws have been enforced by every means up to and including mass murder, and the currencies still lost all value.

Privately-issued moneys have value because the issuing banks have enough assets to buy back their money at par, and the same is true of government-issued money

Jim Glass writes:

Treasury debt is nowhere near the level where it will force default or hyperinflation as an alternative.

The solvency problem of the US circa 2030 is due to federal/military pensions, Social Security, Medicare and other govt health care programs.

Inflation is no remedy at all for these, since pensions and SS are inflation-indexed and the health programs are payable in real terms (which is worse than inflation-indexed).

That means "default" will indeed be forced -- not on T-debt, but on promises to retirees (also assuredly on promises to not raise taxes).

Seignorage is irrelevant -- how is seignorage supposed to finance Medicare?

ThomasL writes:

Hummel details why seigniorage (which he defines broadly as any revenue reaped by the government through monetary expansion) will not be effective, which is why he is focusing on default.

Dr Kling mentioned that in the intro, Hummel mentions it in the podcast and also in the article referenced in the first comment, and it was mentioned again the comments.

It is a good interview. It is worth listening to, regardless of one's opinions on the effectivenes (or existence) of seigniorage, as that really isn't the only issue.

Rebecca Burlingame writes:

Daniel, thanks for the article link. I was struck by the fact that hospital insurance for Medicare Part A runs out in 2017.

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