Hail Interfluidity!

This post is superb, as it is very much trying to elevate the level of debate on fiscal stimulus.  Here is one excerpt:

Lying is optimal. The debate among public officials about austerity cannot be taken at face value. Savers really could flee the euro, dollar, yen or yuan. Interest rates here or there could suddenly spike. A sudden dash to gold is possible. None of these financial market events would directly affect the real resources at our disposal, but any of them could devastate our ability to organize economic behavior, and would call into question the legitimacy of economic outcomes and the stability of governments. For policymakers who seek positive short-to-medium term outcomes, the optimal strategy is to avoid the first-order costs of austerity by spending and avoid second-order costs #1 and #5 by obfuscating their spending as much as possible. Costs #2, #3, and #4 tend to bite over the medium-to-long term, leading policymakers to discount them. I think we should expect a lot more austerity theater than actual austerity, for better and for worse. Expect central bankers especially to preach austerity while intervening madly in the shadows. That’s just what they do. By the same reasoning, we should expect policymakers to justify their actions with a lot of intuitive but awful theory. As the Modern Monetary Theorists remind us, the analogy between a fiat-currency-issuing government and a budget-constrained household is poor. It is, nevertheless, the framework under which most citizens and savers understand government accounts, and forms the basis of conventional discourse. Irrespective of what is a better or worse description of reality, it is safer for policymakers to frame their communication in terms of conventional theory than to promote a profoundly destabilizing paradigm shift. Expect President Obama to keep talking about how we are “out of money” even though he knows better.


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