Tuesday, February 23, 2016

All you need to know

People think central banks have "lots of different tools to work with" but really they have one trick, they can make more money.   The details on on how they do the trick, the words, and the smoke, can change, but at the end of the day their only "secret weapon" is making more money.  If the only tool you have is a hammer, you treat every problem as if it were a nail.  If you try to fix your car, or the economy, with a hammer, it probably won't be a happy ending.

5 comments:

  1. Actually they can also reduce the amount of money as well. They can also set reserve requirements (raise and lower them: essentially levy both positive and negative taxes), and pay (and charge) both positive and negative interest rates. There are other regulatory taxes: such as capital requirements.

    Now you could say that all that amounts to a printing press and a shredder. That's fair. But it's not fair to say they only use the printing press or only the shredder: they are clearly using both.

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    Replies
    1. While they have a shredder, in practice most every central bank increases the money supply every year. So while you are technically correct I would argue I have not left out anything actually important. :-)

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    2. I would also argue that making money disappear is not nearly as impressive a trick as making new real money. Anyone could have a shredder but only the Fed gets create new money without risk of going to jail. Making new money by the billions that actually works for buying things is a rather amazing trick. Shredding money is not a skill to mention on a resume.

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    3. Certainly having a shredder could never count as a "secret weapon".

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