Tuesday, March 29, 2011

The Distinction between Insolvency and Debasement

The Trader's Crucible has an excellent analysis of what Krugman is complaining about with respect to MMT.

It's the clearest and most accessible explanation of Krugman's opposition to MMT that I have encountered so far — and why it is wrong. It's a must-read.

"Governments in control of their money cannot be insolvent. Insolvency is the inability to pay off one’s debts as they fall due. That’s how Wikipedia defines insolvency.

"But the impossibility of insolvency does not mean the fiat currency will have value. A government might be fully solvent even with a worthless currency. On the other hand, Solvency and currency value do not imply each other.

"This distinction between insolvency and debasement is at the heart of MMT. MMT makes a huge distinction between the process of debasement and the act of insolvency – and this distinction has massive practical implications on how governments should act.

"First, it turns out solvency and currency value are confused, even by very smart people. Paul Krugman doesn’t understand this distinction...."

Now that your interest is piqued, go over to The Trader's Crucible and read the whole thing.


mike norman said...

"Paul Krugman doesn’t understand this distinction...."

Neither does Bill Gross, David Walker, the President and nearly all of our representatives in Congress!

Anonymous said...

Exactly - Bill Gross may be in big trouble very soon...