When private firms get loans from commercial banks, that expands the money supply and thats fine. When the government gets loans from commercial banks (although it does not do that often in todays world), that expands the money supply and thats fine. When the government or firms get loans from abroad, that expands the domestic money supply and creates external, foreign currency debts, and thats fine. When the central bank buys assets on the financial markets, if it does that with new money, that expands the money supply, and thats fine. The only thing thats not fine, apparently, is if a government gets a loan from the countrys own central bank. That expansion of the money supply is, for some reason, so problematic that most central bank laws forbid it explicitly. Why? I can see two reasons, and neither holds water. The first is the fear of hyperinflation. Except, do we actually believe that most modern governments would borrow willy-nilly from central banks to the point of hyperinflation? There is very little evidence to support that claim. It does happen, but it is far, far from a common occurence. The second is the idea that the state should not interfere in the market. Except, it does that all the time, so why should this specific intervention be treated any differently? Besides, politics and economics are not separate anyway, and the whole idea that the state will always mess things up is flawed to start with.
Posted on: Mon, 01 Sep 2014 07:04:41 +0000