[A-List] Sabri's question

[Hudsonmi@xxxxxxx]

Dear Sabri,
       Here's Gunnar's answer to your Q's:
Dear Michael,
 
Here is my take on Sabri's two questions.
 
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? 
 
Comment:  
 
The option to create money/credit at will is open to Argentina, Turkey etc. - at a price.  
 
That price is (a) domestic inflation, (b) balance of payments deficit, and (c) depreciation of the currency.  
 
Why?  
 
Because the rest of the world will not accept the currencies of Argentina, Turkey etc. in exchange for its supply of goods and services to Argentina, Turkey etc.

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?  
 
Comment:  
 
If the country in question is Argentina, Turkey etc., the limit to the amount of money the government can create is defined by the issuing government's threshhold of pain insofar as (a) domestic inflation, (b) balance of payments deficit, and (c) depreciation of the currency are concerned.  
 
If the Argentine, Turkish etc. governments go beyond this threshhold, the rest of the world couldn't care less - any resulting economic upheaval and chaos will be confined within the borders of Argentina, Turkey etc. with minimal spillover effects on the rest of the world.
 
If the country in question is the United States of America, whose currency is also the world's currency, the limit to the amount of money the government can create is defined by the rest of the world's readiness to extend to the U.S. the accommodation which it will not extend to Argentina, Turkey, etc. - namely, to continue to accept newly-issued national money in exchange for its supply of real goods and services.  
 
If the U.S. Federal Reserve and Treasury push the U.S. advantage as sole issuer of the world's currency beyond that point, the result is certain to be a world-wide version of the chaotic consequences of excess money creation by Argentina, Turkey etc. 
 
Gunnar
 
 
  MH's comment:     I don't exactly agree. Look at poor Norway. It hesitates to create money, imagining that this is inflationary. there is a LOT of room to create domestic money to put UNEMPLOYED or underemployed domestic labor to work. the result will be higher output, not higher prices. David Hume acknowledged this fact over two centuries ago in letters to Oswald and others (I discuss it in my trade theory book).
       Michael