Friday, October 19, 2012

Guest Post: Should Central Banks Cancel Government Debt?

Readers may recall that Ron Paul once surprised everyone with a seemingly very elegant proposal to bring the debt ceiling wrangle to a close. If you're all so worried about the federal deficit and the debt ceiling, so Paul asked, then why doesn't the treasury simply cancel the treasury bonds held by the Fed? After all, the Fed is a government organization as well, so it could well be argued that the government literally owes the money to itself. He even introduced a bill which if adopted, would have led to the cancellation of $1.6 trillion in federal debt held by the Fed.

Monday, October 15, 2012

Money is a "social convention"

A few weeks ago we noted Bundesbank president and ECB governing council member Jens Weidmann's analogy between the Faustian bargain offered by a money-printing Mephistopheles in Goethe's classic prose and today's ubiquitous oh-so-tempting short-term solution to everyone's pain. His full speech (below), while a little dramatic, should indeed strike fear into many with its clarity. The financial power of a central bank is unlimited in principle; it does not have to acquire beforehand the money it lends or uses for payments. Many believe Goethe was portraying the modern economy with its creation of paper money as a continuation of alchemy by other means. While traditional alchemists attempted to turn lead into gold, in the modern economy, paper was made into money. Indeed, the fact that central banks can create money out of thin air, so to speak, is something that many observers are likely to find surprising and strange, perhaps mystical and dreamlike, too  – or even nightmarish. Of course, Weidmann concludes, it is important that central bankers, who are in charge of a public good – in this case, stable money – bolster public confidence by explaining their policies.