Wednesday, March 5, 2014

Auberon's Bond (or, how I Learned to Stop Worrying and Mint Titania's Coin)

Munger shared a bit of correspondence yesterday. As one commenter notes, it's an old class discussion chestnut used to illustrate what happens when credit markets get constipated. Of course, since it is a story, it's quite naturally open to interpretation:
 The net result of the c-note chasing around town is a sense of relief, and calm nerves quite certainly have economic value, even if nothing material is produced. Heck, if you squint right, and assume away moral hazard risks (which becomes pretty heroic once you endogenize the traveler) it almost seems like a free lunch, at least for the inhabitants of the town.

There was something about the story that reminded me of an old issue of Sandman. Collected in the Dream Country trade paperback, A Midsummer Night's Dream tells the tale of how William Shakespeare performed the eponymous play for the actual court of the fey. At one point (during the intermission, I think), one of the actors summons the audacity to present a bill of charge to the king of færies. Auberon stifles his outrage and condescendingly pours out a small fortune in færy "gold" to the hapless human, and then proceeds on his aloof way. Naturally, upon daybreak, the foolish mortal (who, oddly enough knew enough lore to be an itinerant player, but not enough to remember common bedtime stories) finds himself the proud owner of a purse stuffed to the brim with leaves.

He wasn't as wealthy as he thought he was.

Munger's vignette featured a convenient plot device: each of the (eu?)voluntary exchanges made under dubious credit assumptions was already complete. The c-note circulated to clear up some red in the ledgers. The ABC folks would point out that this is an accounting irrelevancy and what matters is the structure (and heterogeneity) of capital, that the fools' gold is a way for the sovereign to lie to the constituent about the true scarcity of credit.

But still, that refractory period enjoyed after the discharge of legitimately incurred debt, the joy felt by the actor after earning a boodle from the Lord of the Fair Folk, are these not valuable public services? If a constituency so wills it, should they not be able to forgive themselves a round of imprudent borrowing? What if they really really mean it that they totally pinky swear that they're off the easy credit spike?

Do we really need a credible threat of ex post regret to discipline private indebtedness? Isn't forgiveness also a virtue? I mean, we have an independent central bank, after all, one totally above the political fray. What's the worst that could happen?

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Do you have suggestions on where we could find more examples of this phenomenon?