A Good Post About Fiat Money

Which really is the best kind of money. While I can’t sand what Matthew Yglesias writes about education policy, he is one of the few pundits who clearly articulates how fiat currency works and what that means for policy (boldface mine):

This helps highlight two related issues, the insanity of UK fiscal policy right now and the insantiy of the ratings agencies’ approach to sovereign debt ratings. When the UK government borrows money, it borrows pounds sterling. The UK government also has the capacity to create infinite quantities of pounds sterling instantaneously. Therefore, the UK government can never be forced by economic circumstances into defaulting on its debt obligations. At worst it could be forced into inflationary policies that erode the value of its pound-denominated debt. If you’re an investor, that’s a real thing to worry about when buying British debt. But any such inflation would equally impact any pound-denominated debt no matter what the circumstances of the issuer. University of Cambridge debt can’t be safer than UK sovereign debt in inflation terms.

There’s also a good point about inflation too:

All debt agreements go to seed in the case of a sovereign default, which turns out to be one of the best reasons to avoid one. If you hold pound-denominated Cambridge bonds at a time the UK sovereign chooses to default you’re much more screwed than you would be if the UK just adopted mildly inflationary policies for a decade.

I think a lot of people don’t realize that some inflation will hurt them much less than losing everything. As economist Michael Hudson often writes, “Debts that cannot be repaid, will not be repaid.” The question is how much damage are you willing to take.

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