From: trotsky (Bleuler, 6:59) ID#248269
Message 21615817
also, one day the world will probably re-learn an old lesson the hard way: fiat money isn't a 'reserve' - it's merely a promise, and one that can't be kept.
All assets carry an implied promise. Notice that we can think of a machine or a building as constituting contingent promises of future delivery. Exchanging current resources for a contingent promise always involves some risk that the promises will fail to be kept - and therefore any analysis of a monetary base of fiat reserves must start with this risk. Assuming that the risk of default on the implied promise of fiat money is 100% because it is "merely a promise" is not a good start.
the most important effect of China's move toward a currency basket is that it spells the beginning of the end of the so-called 'dollar hegemony'. some have argued that in spite of the 'reserve currency' issuer being the most indebted nation on earth
We normally do not think of assets as debt, when one considers that embodied in an asset is an implied promise of future resources then one should see that debt and assets are equivalent constructs. The main difference between loaning resources to another party (i.e. creating debt) and exchanging those same resources for an asset is the moral hazard that the other party will default on their promise. While both exchanges carry risk, moral hazard is absent from the asset exchange.
No doubt, some exchanges that would benefit both parties do not occur because of moral hazard risk. Not only does this imply that more debt is not necessarily an indication of economic weakness, it also illustrates that increases in output can be achieved if the risk and/or the cost of moral hazard is reduced. If there is a truism in economics it is that the market always gropes towards pareto optimality, i.e. if there is an exchange than can occur save for some risk, the market will develop mechanisms to mitigate that risk.
In the market for debt, two innovations of the last 30 years have greatly reduced the risk and costs of default: information technology and the derivative market. Information technology, obviously, has allowed for greater identification of risky agents while also greatly reducing the cost of developing and disseminating this information. The derivative market has allowed risk to be hedged and it also illustrates the missing market problem, i.e. that whether an exchange occurs is usually dependent upon the existence (or possibility) of another set of exchanges (markets tend to throw off indirect benefits in excess of the benefits accruing to its participants).
The bottom line is that one cannot simply look at some debt level, relative to either the past or some other country, and imply anything negative or that it is a portent to economic collapse. US debts levels reflect, in part, the fact that the US has a greater degree of complete markets and better information. |
