COMMENT
Breadcrumb trail navigation:
By Brad DeLong
Published: July 19 2010 22:21 | Last updated: July 19 2010 22:21
It was in 1829 that John Stuart Mill made the key intellectual leap in figuring out how to fight what he called "general gluts"?: he saw that what had happened was an enormous excess demand for particular financial assets was driving an enormous excess supply of goods and services "â?? and if you relieved the excess demand in finance you would cure the excess supply of labour. When the government relieves an excess demand for liquid money by printing up cash and swapping it out for government bonds, we call that expansionary monetary policy. When the government relieves an excess demand for bonds by printing up more Treasuries and selling them to finance its own purchases of goods and services, we call that expansionary fiscal policy. And when it prints up cash and bonds and swaps them for risky private financial assets, or when it guarantees private assets and so raises the supply of high-quality and reduces the supply of low-quality bonds, we call that banking policy.
But what happens should a government print more bonds than investors think it will dare to raise future taxes to pay off? What happens when a government's debts are no longer regarded as safe? Then policies of monetary or fiscal expansion or of banking sector asset swaps and guarantees do not boost but reduce the supply of safe assets: they move government paper into the "risky"? category. We saw this in Austria in 1931 and east Asia in 1997-98 and Greece right now. Then not expansion but rather austerity, to restore confidence in the safety of government liabilities, is the best a government can do "â?? that and cry for help from outside.
You have viewed your allowance of free articles. If you wish to view more, click the button below.
Read Full Article »
