[A-List] RE: Sabri's questions
Henry C.K. Liu
hliu at mindspring.com
Thu Aug 26 14:46:24 MDT 2004
Sabri Oncu wrote:
>>I think the many responses DID answer your questions.
>My questions below are still unanswered:
>1) If governments can create money/credit at will, and I agree with this
>proposition, why do over-indebted countries such as Argentina, Turkey and
>the like not choose that path but continue to keep borrowing both
>domestically and internationally?
Domestically, a government borrows so that sovereign debt provides a
benchmark for the domestic private debt market. Governments need never
borrow for lack of money. Imternationally, its a different story.
Governments borrow foreign currencies mostly to finance import.
>2) When government creates money at will and hence leads to an increase in
>the quantity of money, would there not be inflation unless the resulting
>excess demand is met by increased supply? Consequently, are there not limits
>to the amount of money the government can create?
The increase in supply of money is always matched by the increase in
demand for money, the only fluctuation being a change in the cost of
borrowing (interest rates) and the threshold of credit worthiness of the
borrowers. The larger the money supply the low these two indicators,
benefitting the financially weak.
Whether an economy grows or declines depends on many factors, monetary
policy is only one factor. Fro example, a declining population redcuces
demand and is deflationary even if there is a very loose monetary
policy. A monetary policy is a bit like a headwind. It adds or
detracts from the gorund speed of a flying vehicle even if the air speed
Henry C.K. Liu
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