Tyler Cowen is flat out wrong about the nature of fiat money

Real-World Economics Review Blog

On his Marginal Revolution blog Tyler Cowen states:

High debt means higher payments to banks and other intermediaries, and so that money need not disappear from the stream of aggregate demand. Investment is AD too, and more generally AD theories based on short-term changes in the distribution of wealth have not generally succeeded in the past (with apologies to Michael Kalecki). It is true that wealth redistribution will induce sectoral reallocations, perhaps significant ones, but then a debt-collapse theory requires a lot of the predictions of sectoral shift theories. At least for the recent crisis that is not obviously going to do the trick, even if sectoral shifts have been underrated by a lot of Keynesian commentators

That’s vaguely right when you’ve borrowed from a pension fund or your dad.

That’s flat-out wrong when you’ve borrowed from an MFI, a ‘Monetary financial Institution’ or a bank with a government license…

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