Tyler Cowen: preference

Transcript context

…The fiscal theory does not require that money in treasuries are perfect substitutes. It allows that, which is the lovely fact, given the greater and greater substitutability of all financial assets. But you can add liquidity demands for all sorts of stuff very easily in the fiscal theory. Liquid treasuries traded — and this is on the run, off the spread, that liquid treasuries have slightly different interest rates than unliquid treasuries. Money can trade at a different interest rate than treasuries. No problem whatsoever to have a variety of assets that have a variety of liquid discounts in the fiscal theory. The question is, do these liquidity spreads — do they determine the price level? The dog and the tail don’t have to be in exactly the same place. The question is, if you hold the tail, does the dog wag? And the central problem with the view you mentioned — the classic monetary problem — there are these spreads, but the government does not control the quantity of money. Doesn’t even pretend to control the quantity of money anymore. You need a liquidity demand for some special asset money, and you need the government to control its supply if you want that to determine the price level. Instead, the price level is determined by fiscal theory, and then the quantities of money versus other assets are determined by people’s desire for various liquidity things. All the liquidity ends up doing is, it ends up driving slight interest rate spreads. If the government doesn’t give you enough money, then you have a little bit higher interest rates spread on one asset versus another, but that’s not the key for determining the price level when the government doesn’t control the supply of money. Healthcare — I’m a big fan of your proposals for what I think you called time-consistent health insurance. You buy health insurance and you buy insurance against your premium going up. If later on, you develop a serious condition, you’re insured against the fact that your insurance costs more, right? Now, why has no one done this? Because it does make sense. People did it [laughs] until it was made illegal.…

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