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The problem is that money is just a governmental IOU backed by taxes.  It isn't an asset as far as the government is concerned, it's a liability.  In a functioning system, people are willing to accept those IOUs because the government is good for them, but the amount of debt involved now is beyond the ability to issue money to cover (i.e. there is no way to raise enough taxes to back that much money).  Pumping more money into the market is just pumping more bad paper into the market.  It may devalue existing debt by devaluing the means of paying the debt (money), but it can't devalue the debt as much as the assets that supposedly backed the debt have devalued, so it won't fix anything, and lenders will continue to insist that more hard assets be put on the table to balance the bottom line.
by rifek on Fri Oct 24th, 2008 at 04:54:07 PM EST
[ Parent ]
As long as the debt is denominated in their own currency, there's nothing in principle to prevent them from printing enough money to cover it. They can, after all, issue the currency by fiat.

But there's the pesky little detail that it'll shoot their credit-worthiness to shreds.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Oct 24th, 2008 at 05:00:55 PM EST
[ Parent ]
... for them', because they have to pay tax liabilities.

That is, the backing is not the tax receipts collected, which determine how much of the money created by spending is then immediately destroyed versus how much is added to the supply of fiat currency ...

... but the tax liabilities that give households and businesses an urgent need to be able to make payments in fiat currency.

But as we see in countries where monetary systems melt down into hyperinflation, that is just the kernel of demand for fiat currency ... when a currency loses its ability to function as a store of value, and becomes a means of exchange and nothing more, it no longer functions as a full fledged money.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 26th, 2008 at 03:54:10 PM EST
[ Parent ]
Right, a government can force the adoption of a currency by making it the only accepted means of payment for taxes.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Oct 26th, 2008 at 04:56:33 PM EST
[ Parent ]
However, they cannot force people to hold balances in the currency if people are confident that the currency can always be obtained at better terms by holding an asset denominated in another money and cashing it in when needed ... which is the hyperinflation scenario.

In the face of hyperinflation, tax liabilities are always easier to meet if they are deferred, unless the tax liabilities are indexed, but then that turns into a disincentive to hold balances in the fiat currency, since the direct way to gain the returns in the currency to meet the obligations are to hold a more stable money.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 26th, 2008 at 05:33:30 PM EST
[ Parent ]

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