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August 20, 2007

Life in a Politically Driven Economy

Friedrich von Blowhard writes:

Dear Blowhards,

It feels good to realize that I'm not the only person who is closely parsing the words of the Federal Reserve (as I did in my recent posting Information, Please). In the L.A. Times of August 18 I read a front page article, "Fed Gets Message, Lowers Key Rate," by Peter G. Gosselin which makes it clear that interpreting Fed-speak is a hobby of many on Wall Street:

The central bank used uncharacteristically unambiguous language, saying a credit crunch stemming from the sub-prime mortgage meltdown "appreciably" increased the risk of a further slowdown in the economy.

"In Fed-speak, things are either 'slightly' or 'somewhat,' " said Jan Hatzius, chief U.S. economist with investment bank Goldman Sachs Group Inc. "Saying that the risks have increased 'appreciably' is a pretty strong statement for them."

In fact, Wall Street is as interested in what the Fed doesn't say as in what it does say, as the same article makes clear:

And in some artful wording, Fed officials did not completely throw in the towel on their concern about inflation or fully concede that financial market trouble actually was slowing growth...It simply didn't mention its concern about inflation and only discussed the possibility that financial market turmoil could cause a slowdown.

"It was an unusually skillful commentary," said Allen Sinai of Decision Economics.

The only analog I could think of to this rapt attention paid to both spoken and omitted language was back when U.S. Kremlinologists used to microscopically parse the utterances of the leaders of the Soviet Union. Pondering the similarities, it struck me: the Fed has become, over the past few decades, the Politburo of the U.S. economy.

Which in turn highlights a few home truths that appear in sharp relief in the middle of crises like this one:

First home truth: Despite its Olympian stance, the Fed's decisions are political, not merely technocratic. The Fed may not be elected, but it sho'nuff allocates pain and profit via its influence over debt markets, and there are real-world winners and losers from any change in Fed policy. (By some strange coincidence, many of those winners work on Wall Street, where they make very substantial campaign contributions and hire lots and lots of lobbyists.)

Lest we forget, the U.S. economy is not, or at least is not primarily, a capitalist economy; it is a mixed economy, as they used to say in my freshman economics textbook. (If this euphemistic term doesn't appeal, you could call it a fascist economy or a corporatist economy, but let's not get bogged down in petty details.) What that means is that while we have a fair amount of capitalism going on around the edges, the center of our economy is politically driven, not market driven.

Certainly, the palpable longing of Wall Street to be rescued by the Federal Reserve, made explicit in television pundit Jim Cramer's recent, um, demand that the Fed take action, leaves one in no doubt about who the Big Kahuna is in the financial sector. And the political domination of the U.S. economy is equally obvious, if you care to look for it, in the healthcare sector, in the energy business, in public utilities, in telecommunications, in the airline industry, among defense contractors, in the agricultural sector, in the ever-increasing robustness of state and local government revenues and employment, yadda yadda yadda.

So current journalistic habit of reifying "the market" and acting as though the Fed is just a bunch of geeks doing tech support is, well, just plain silly. Worse, it prevents us from seeing whose ox is being fed and whose ox is being gored.

Second home truth: Our ideological and conceptual apparatus--our public intellectual life, so to speak--doesn't help us to understand our own economy very well. Yesterday I looked at the table of contents of a currently popular economics textbook. The book spent many pages describing how the market driven part of our economy works (microeconomics). The author spent a small number of pages describing the technicalities of how government interventions in the economy impact market based activity (macroeconomics). As far as I could tell, however, the book devoted no pages whatever to how the politically driven part of our economy (lobbyeconomics) really works. Not a word on how politicians and regulators make economic policy choices, what information they are sensitive to, how one could predict their behavior, etc. etc.

If you go on a website like and look at who has been spending money on campaign donations and lobbying over the past couple of decades, I think you will get a much better idea of what will actually happen to the U.S. economy, at least in the medium-to-long term, than you will studying economics. Heck, I'll give you one prediction for free--based on the sums spent on lobbying and campaign contributions, don't look for America to develop a highly efficient healthcare system anytime soon.

Third home truth: If we are going to run a successful mixed economy, as opposed to one that specializes in overcompensating certain politically well connected industries, we need to have much more visibility in how decisions are made, and more open debate about the consequences. I would suggest that we pay our economists to search out the systemic failure modes of this mode of decision making a lot more diligently. (Granted, info on backroom deals may be harder to obtain that unemployment numbers, but a surprising number of economists seem to act as though even poking into such stuff is somehow beneath them, or irrelevant to their concerns.)

In the current example, the housing bubble and the mortgage crisis have big fat political policy fingerprints all over them. The run up in home prices was clearly foreseeable once Mr. Greenspan decided to pump up the economy with very low interest rates in the wake of dot com crash, the Enron debacle and 9/11. Another political element was the decision to permit the gain in home mortgage market share by unregulated lenders who intended to instantly sell off the loans they were making, which came at the expense of highly regulated financial institutions who intended to keep those mortgages on their own balance sheets. Apparently the (captured) financial regulators decided that putting tighter loan quality restrictions on the regulated home lenders would only drive more business to the unregulated ones--which wasn't good news for their clients, er, I mean the companies they regulate--so we had a race to the bottom in loan standards.

Another political element is the bizarre ongoing role of the rating agencies. These are the guys with no skin in the game who reassured everyone that the securitized sub-prime mortgages were investment grade once sufficiently manipulated with derivatives and structured finance. Or at least they did until the manure hit the fan in recent weeks. In case you're not aware of it, the government assiduously promotes the financial wellbeing of organizations like S&P and Moodys by simultaneously requiring that most debt instruments be rated and by legally restricting the number of organizations that can provide that service. This is a trifle weird, since anyone paying attention to the Enron debacle knows that these rating agencies are not, exactly, (1) ferocious watchdogs or (2) the best judge of complicated financial products. Not only that, they get paid by the very people they are supposed to be policing.

Finally, of course, there is the fact that the housing boom supported consumption by the heavily indebted U.S. consumer, who is apparently supposed to be the beast of burden of the global economy. Well, don't get me started on why politicians want that to continue.

I beg of you to note that I am not making a case here that the Fed's market interventions aren't valuable to society at large (at least in the short term.) Please save your breath, I don't need you to point out to me that we have to continuously save the financial sector's bacon or face another Great Depression at every turn. (I will concede that this is probably true, at least the way we're currently organized.) I am just suggesting that there are some pretty rocky waters ahead for the U.S. economy, and we would do well to find out why our boat finds some rocks so hard to steer away from.

Many of those rocks are clearly visible: our wild overinvestment in the housing sector (that strange asset class that does not throw off an income stream); our very low savings rate; our dependence on international investment in our economy; our addiction to oil that increasingly comes from politically unstable parts of the globe; the looming crisis in our public finances as the baby boom generation retires; the ever increasing share of national wealth devoted to an extraordinarily inefficient healthcare sector, etc., etc., etc. I shudder to think how many more such rocks may lie under the water to be discovered only when we hit them.

We are unlikely to navigate these problems successfully if we do not even acknowledge how our politically-driven economy actually works and makes decisions. Do we really want to our economic policy being made by a bunch of special interest lobbyists carving up the body politic inside the beltway?

You may not be interested in politics, but politicians and lobbyists from various industries are very, very interested in you and your wallet. If you want to live in a mixed economy, and most people in fact seem to want this, then you will have to pay real close attention to what those darn politicians, a number of whom work for the Fed, are up to. And not let them get away with claiming to be technocratically above it all. That's part of the scam.



posted by Friedrich at August 20, 2007


"... [the government legally restricts] the number of organizations that can provide [rating services]."

How? Why?

Posted by: Daniel Newby on August 20, 2007 7:20 PM

Mr. Newby:

From the Wikipedia article on Nationally Recognized Statistical Rating Organizations:

In the United States, the Securities and Exchange Commission (SEC) permits the use of credit ratings from certain credit rating agencies for certain regulatory purposes. The credit rating agencies whose ratings are permitted to be used for these regulatory purposes are referred to "Nationally Recognized Statistical Rating Organizations" (or "NRSROs"). The use of the term NRSRO began in 1975 when the SEC promulgated rules regarding bank and broker-dealer net capital requirements. The idea is that banks and other financial institutions should not need to keep in reserve the same amount of capital to protect the institution against (for example) a run on the bank, if the financial institution is heavily invested in highly liquid and very "safe" securities (such as U.S. government bonds or short-term commercial paper from very stable companies). The safety of these securities, under this approach, is reflected in their credit ratings, as determined by certain highly respected credit rating agencies. At one time, there were seven NRSROs, but, due to mergers, this number dropped to three during the 1990s. Recently, the SEC, arguably as a result of political pressure and/or concern about concentration in the industry, added to this number, first with Dominion Bond Rating Service (a Canadian CRA) in 2003, and A.M. Best (considered highly regarded in particular for its ratings of insurance firms) in 2005.

In short, thousands and thousands of bond issuances come out every year, almost all of which are legally required to be rated, and there are five, count 'em, five companies that have been recognized by regulators as able to rate them. This has been, as you would expect, very good for the profits of these rating agencies. It has not worked out so well for investors who rely on these ratings, however. You notice that the very quality the ratings are supposed to measure, liquidity and safety, are the ones that mortgage backed securities have turned out to lack in a fairly spectacular fashion. Some people would suggest that rating agencies have an inherent conflict; if they stick to stringent quality standards, they'll restrict the number of issuances that they'll get paid to rate.

Posted by: Friedrich von Blowhard on August 20, 2007 10:02 PM

Is the politicization of the economy necessarily, on balance, a bad thing?

One of the commentors to FvB's last post stated that the Fed's great concern is not saving this or that company, it's keeping inflation (and the even greater danger of deflation) under control. Put another way, the Fed is engaged in an ongoing attempt to iron out the wilder swings of the business cycle. If in the process some businessmen are saved from the full consequences of their acts is that worse than the economic carnage that would ensue if the unregulated business cycle were allowed to take its course?

Our whole society, not only businessmen and politicians of both parties but the general public as well, came to the decision, starting with the pre WW I progressives and gaining momentum under Wilson and then reaching maturity with FDR and every administration since, that the trade off, call it the managment and allowance of low level corruption in the interest of ironing out the business cycle, was less harsh, less unfair, less jarring to the body politic than the boom and bust cycle of laissez faire capitalism.

Was our society wrong in coming to that consensus? I leave it to you.

Posted by: ricpic on August 20, 2007 10:06 PM

The ratings agencies were getting fees from the securitized debt-bundlers to rate the bad paper--quite the conflict of interest, no?

The direction of the economy is plain to see. The USA is the greatest debtor of all-time. Hyperinflation of the currency will wash away these sins, and plunge the country into Argentina-like status. When the next series of rate cuts comes, the hyperinflation will pick up in earnest. After we lose our reserve-currency status, I shudder to think what the country will be like with a decimated manufacturing base that has to compete with China. Either we withdraw from the globalization model to rebuild our economy (I hope) or we do ????? Very tough times ahead.

A "mixed" economy is basically a centrally planned economy with some free enterprise thrown in. Its just a hop and skip to ruin because the government will continue to take over more and more of the economy. In a mixed economy, you have to have one foot out the door, investment-wise. A better term for this arrangement is "crony capitalism". Don't expect the economists who graduate from mainstream schools to advocate change or accurately describe the situation--the same people who endow the universities, employ said economists, and depend on the FED to perpetually inflate the currency to overcome the business cycle are the mover and shakers of the crony capitalist system.

Buy your gold, oil and energy, and tangible goods now, at relatively bargain-basement prices. I suspect a year from now, they'll be a lot more expensive (or alternately stated, your dollars will be worth a lot less). Three to five years from now we will basically be done as the world's premier country. Maybe then we can start to right what is wrong here, economically, socially, and politically. A good bit of pain and skipped meal or two sharpens the focus of an easily distracted public.

Posted by: BIOH on August 20, 2007 10:16 PM

Forget to take your meds this week?

If I want this kind of paranoid rant I can get it from any one of a hundred other websites. I've been hearing "the sky is falling, the sky is falling, and it's all THEIR fault" since I was old enough to listen, and I've had quite enough of it. And you aren't even entertaining for chrissake!

Posted by: Todd Fletcher on August 20, 2007 11:40 PM

Todd: Exactly. There has never been more reason for optimism than right now. The Singularity is Near.

Posted by: jult52 on August 21, 2007 7:33 AM

BIOH, I always like reading your comments here because I generally agree with you and I like your no BS attitude.

But I am always sceptical when someone makes predictions of impending civilizational collapse with arguments based on some bad trend. James Kunstler is an example of a left-wing doomsayer, who strikes me both as monomaniacal and gleeful. You make similar arguments, but from the right.

In my mind I make an analogy to someone who cries that a person with a small cut is going to bleed to death -- which, if looking only at present trends (bleeding) and factoring out all competing processes (coagulation), would be indeed true. Yet paper-cuts usually don't kill.

Posted by: PA on August 21, 2007 9:42 AM

A couple of questions for you who actually know a thing or two?

1) How do y'all feel about fractional-reserve banking in the first place? Is it really necessary? I mean, there it is, here we be, etc. But was it really needed for us to achieve prosperity?

2) Also, while I agree with Ricpic that some managing of the business cycle seems necessary, are our elites and bosses and managers going about it in an even semi-fair, semi-effective way? In other words, even if the "the economy needs some messing-with" premise is accepted, do we have to settle for the kind of managing that we currently have?

Posted by: Michael Blowhard on August 21, 2007 11:27 AM

Friedrich, Thanks for another penetrating and thoughtful post. I would just point out that there are economists who study the political input into the economy, including lobbyeconomics: the so-called public choice or Virginia school, which derives from the work of James M. Buchanan and Gordon Tullock, among others. Their work doesn't support much optimism about the possibility of making the state's real decision processes transparent.

Posted by: Lester Hunt on August 21, 2007 11:44 AM

I didn't say the civilization would collpase--I just said that there's really no reason for the US to have reserve currency status for the dollar anymore. Many other countries around the world have already said they are going to be dumping dollars for other currencies in their reserves. In case some here haven't noticed, the real estate market is in free-fall. So maybe for you the sky isn't falling, but for a heckuva lot of people, it is! Once the US dollar loses reserve currency status, how are we going to close our 800 billion dollar a year trade deficit? Especially since we are so fond of exporting our manufacturing base to China? Can someone explain this? How are we going to buy 70% of our oil? Sounds like a lot of trouble ahead to me. I think a lot of people are under the illusion that because we have never seen really hard economic times here recently in America, that it can't happen. You are dead wrong, in my opinion. How is America going to get out from under its gigantic debts and unfunded liabilities?

Fractional reserve banking is a scam. We can do without it. I have no idea why people argue for it when its obvious that all it has done is destroy the middle class and magnified the wealth of the rich. Ask yourself where the middle class would be in America if two people in the family weren't working and paying taxes? Fifty years ago, a family could live on one income. That's a 50% haircut. The FED brought about the Great Depression with loose money, exacerbated and greatly lengthened it with tight money, and has destroyed the value of the dollar in the post-WWII era. Along with that, it has greatly impoverished the middle class. The way you deal with and mitigate boom-bust cycles is with savings, not cheap fiat money created out of thin air. You forego consumption during good times to save, damping the boom, and then when things go south for a while, you spend some of the savings, damping the downturn. Central banking just amplifies the business cycle tremedously, causing great booms and great busts. I'm just waiting for the bust.

Also, when did I become "paranoid" for simply observing reality? What did I say that is wrong? How do other countries with gigantic debts repay them? Any historical examples? Please provide them to poor, little paranoid me, so that I might allay my fears and save a few bucks on the meds, eh?

Posted by: BIOH on August 21, 2007 12:19 PM

How good a thing is it, do you suppose, that we have an economy that's so complex that much of what goes on can't be understood by most people? Doesn't that tend to mean that there will always be a class of people (avaricious, able to juggle zany abstractions) who will be able to fold deals back on themselves (derivatives, etc) and then skim money off as it goes by?

Which is OK, I guess, provided some oversight is possible. But is there any way to guarantee relative non-abuse of this *if most people literally can't imagine what the hell is going on*?

I mean, with art and food and such, there's always the public bringing the overcomplicating zanies back down to earth, even if it takes a long time. And in politics, a really-really-really bad politician might (might) get voted out. But where are the checks on the high-abstraction financial sharpies? And, given how complex what they do is, how can there even be any?

Hey, here's a short John Kay essay more or less about this:

If I follow him right, he's basically saying that in high-abstraction markets, wizards and insiders will always triumph over everyone else, just because they can.

Is this a good and/or desirable state of affairs?

Which is more or less what prompted my comment above asking about franctional-reserve banking. Crank it back to the basics, baby!

Posted by: Michael Blowhard on August 21, 2007 12:51 PM

Great post Friedrich!

Posted by: yahmdallah on August 21, 2007 2:33 PM

Very interest post...and probably entirely accurate. Good investing tip---check who's making the biggest political contributions. Why didn't anybody tell me long ago?

Posted by: annette on August 21, 2007 4:24 PM

"Hyperinflation of the currency will ...plunge the country into Argentina-like status." Not quite - since you won't have the consolation of blaming those damn Yankees.

Posted by: dearieme on August 21, 2007 5:54 PM

Fractional-reserve banking is the economic equivalent of heroin. The US was already pretty much hooked in the 19th century, but the '20s closed the deal.

In fractional-reserve banking, the state uses its power of fiat (or, in the 19th century, its power to suspend bank redemptions without liquidation, which amounts to the same thing), to manipulate the yield curve (interest rates at various durations).

With state protection, banks can borrow (eg, from you) at short maturities (eg, you can go to the ATM any time and take out money), and lend (eg, by buying subprime mortgages) at long maturities. They promise to pay you right away, but the money they'd pay you with is due over the next 30 years.

In a world without FRB, supply and demand for loans of various durations would actually set a "natural yield curve" which would be stable - meaning none of these panics and booms. If you needed to borrow money for 30 years, you would have to borrow it from someone who wanted to lend it for 30 years. Changes in the yield curve would only occur as the result of actual changes in the real behavior of real people.

Because the Fed's artificial yield curve is below the natural yield curve (this is basically the entire point of "easy money"), there is a continuous stream of new money flowing out of the future to the present. This is diluting the money supply, which is logically equivalent to the confiscation of your savings. The effect is just the same as when kings of old clipped and debased coins. The official number called "inflation" substantially misrepresents this dilution, whose effect cannot be quantified.

Furthermore, FRB is highly addictive. The new money is not just printed and spent, as if this was Zimbabwe - it corresponds to new debt, which has to be paid off (or at least refinanced; watch for systematic refinancing, it is always a sign of bad finance).

This debt makes it impossible to simply stop taking the drug, because the "natural" yield curve that would pertain if the Fed disappeared tomorrow is stratospheric beyond belief. Over the next 30 years, Americans are scheduled to pay off far more debt than actual dollars that exist in the actual world.

The whole system is one of the great criminal abuses of the 20th-century democratic state. We think our system is so great because, unlike the Nazis and Communists, it didn't engage in mass murder. But there was certainly enough fraud and robbery.

The worst people are the economists who defended it. Since the 1930s, the entire profession has been twisted around the vast career advantages of shilling for this criminal scheme. When Victor Klemperer saw his fellow professors signing up with the Third Reich, he wrote in his diary that they should be strung up on the lampposts and left there "for as long as is compatible with hygiene." I feel pretty much the same way about the Keynesian and Fisherite sects of economics, to which 99% of practicing economists owe their training.

For more on the subject, try Murray Rothbard's Mystery of Banking - I believe it's online.

Posted by: Mencius on August 21, 2007 7:40 PM

"In a world without FRB, supply and demand for loans of various durations would actually set a "natural yield curve" which would be stable - meaning none of these panics and booms"

This completely ignores the empirical facts, specifically that the period of a weaker FRB (say, 1870-1940) was marked by much greater and deeper economic cycles than have been present since WWII. Granted that the FRB is not the unalloyed blessing some make it out to be, the alternative of dependence on something like gold has huge problems. Granted too that the Fed decision to allow asset inflation over the last decade has been very problematic.

Friedrich's original post was terrific, but I have to wonder if you're really realizing all this just now. Don't you think it's pretty common knowledge that we live in a heavily politicized economy? I always thought it was pretty obvious.

Posted by: mq on August 22, 2007 1:14 AM


On the one hand, the fact that we live in a mixed economy is common knowledge. But particularly since the Reagan years, we've been inundated with a lot of blather about how we live in a capitalist society where "the market" rules. The weird effect of the superimposition of these intellectual factoids has been, I believe, to create the bizarre impression (much on display in the mainstream media over the last 25 years) that a benevolent group of government, financial-industry and Silicon Valley technocrats has matters well in hand and we can all invest in the stock market and pretty much go to sleep. Whenever things aren't well in hand, that's the result of that naughty "market" misbehaving again and isn't it good that the common folk can rely on the technocrats, who will shortly have things well in hand again.

This ignores at several key points.

The first is that many of the problems we've seen aren't the result of the inherent unruliness of the market at all, but are actually the more-or-less inevitable result of previous decisions by the technocrats, who actually lurch from crisis to crisis while patting themselves on the back for their Olympian management skills (Mr. Greenspan was the Platonic Ideal of this type of technocrat). Clearly our current credit market woes fit squarely into this pattern of foreseeable negative consequences of previous "quick and dirty fixes."

The second is obviously related to the first; to wit, the constantly lauded success of the technocrats in running the economy for the past few decades has involved pushing a lot of problems under the rug which are not going to stay under the rug forever. Globalization has gotten us all cheap Chinese goods, but has undercut the domestic manufacturing sector. Our healthcare system continues to stumble along, but all the while sucking more and more resources into its maw (it now accounts for a sixth of the economy and, more astoundingly, a sixth of the jobs in the country.) We decided not to try to develop alternatives to cheap imported oil and now find ourselves fighting in Iraq and serving as the Praetorian Guard to the House of Saud, etc., etc. None of these "downsides" gets factored into the stock market happy talk that makes everyone content to sit back and let the technocrats run things.

Third, the view that the technocrats have things well in hand encourages the ultimate economic policy makers in Congress that it's okay to do deals with special interest groups, even if they might not be in the national interest, because, well, the technocrats have things well in hand and the U.S. is a rich country that can afford a little economic inefficiency if it gets Congressmen re-elected. In short, our major economic policy decisions end up getting made by a bunch of corruptable politicians who feel okay putting off making any painful decisions (like ones that might not get them re-elected.) I cannot find another theory that accounts for our failure to reform entitlements, deal with our dysfunctional health care or educational systems, etc.

Fourth, when technocrats have matters well in hand, nobody seems to notice that mostly things are well in hand for the technocrats and their buddies, the "New Class" of financiers, professionals, senior corporate managers, university professors, journalists, etc. No wonder we see so much happy talk!

Posted by: Friedrich von Blowhard on August 22, 2007 12:33 PM


There was no FRB before 1913. Also, the large banks in America were fond of creating booms and busts--they would profit on the boom, and then buy up assets for pennies on the dollar in the busts. This led to the people petitioning the government to end the "money trusts". The private banking creators of the FED got in front of that movement and proposed the FED as the solution to the boom and bust cycles so dear to bankers--the fox would guard the henhouse! And now we have the mess we are in today.

Posted by: BIOH on August 22, 2007 12:42 PM

Dear FvB:


Posted by: Steve Sailer on August 22, 2007 2:05 PM

Is the politicization of the economy a bad thing
in itself?

From the pure standpoint of the economy, of course
it is a bad thing, as we are always reminded that
controls act as a brake, and produce inefficiencies.

But, pay attention to the word brake. Would you buy a car with no brakes, on the grounds that it
uses fuel more efficiently? (Braking burns out a
lot of fuel). If all the purpose of a car was to go fast of course, but we do not get into cars to
go fast, but to reach a certain destination in one
piece, and once there we should be able to stop and get off.

The same things happen in economy. An economy does
not happen all by itself, in isolation, but is part of the functioning of a country, and part of the political management of the country is seeking stability, for which purposes sometimes there must be intervention in the economy.

The one thing to remember is that without political stability you cannot have much of anything else, not even an economny, so to complain of measures that enhance stability because they interere with the economy is to ask to saw off the limb you are sitting on.

Posted by: Adriana on August 22, 2007 11:48 PM


You can't use inductive evidence against deductive logic. It simply doesn't work like that.

If you're looking for a genuine hard-money bank, try the Bank of Amsterdam in the 17th and 18th centuries. There was certainly some fairly tight money toward the end of the 19th century, but nothing like 100%-reserve. And plenty of shocks to the monetary and banking system.

What's unfortunate is that a digital financial system would be very good at precise maturity matching, much better than any historical environment.

The entire Bagehotian theory of "lenders of last resort" rests on a distinction between insolvency and illiquidity which is entirely spurious. If you have a portfolio of loans at term X, the market price of those loans will change according to supply and demand for money at term X. If this price falls across the banking system because a maturity mismatch breaks down - ie, people who actually demand money at term Y, where Y

A central bank in a fiat system can quench such bank runs completely, but when it does so, even when it promises to do so, it is effectively monetizing debt whether it likes or not. Thus our shameful record of monetary dilution.

Posted by: Mencius on August 23, 2007 2:28 AM

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