Yglesias

Arguing With Nobel Prize Winners: Can A Great Nation Fail To Debase Its Own Currency?

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CREDIT:

The idea, which Dylan Matthews found a variety of credible people to endorse, that the Federal Reserve might try and fail in an effort to raise the price level strikes me as totally bizarre.

Imagine a situation in which you are the only person in the world who’s capable of producing diamonds. But you also have the ability to produce arbitrary quantities of diamonds, at any time, instantly, and at zero cost. Now why on earth would anyone worry that you might be unable to reduce the price of diamonds? I think that if someone in that position said, “I want to make diamonds 25 percent cheaper and intend to do whatever it takes to make that happen” that the price of diamonds would fall more or less immediately by roughly 25 percent. After all, the magical diamond man has promised he’s going to make this happen. You probably wouldn’t need to do anything at all. To be sure, just to show the world that you’re not a jerk and to maintain your credibility for the future it would probably be wise to follow-up the crash in the diamond futures market with the production of some actual new diamonds. So instead of diamonds, say you had the ability to produce arbitrary quantities of dollars….