What prevents the government from...? (re:money) (1 Viewer)

[todd s]

I know their is an easy for this. But, since the government prints the money. Why can't they just print more? Now, I know it would deflate the value against other currency and cause problems. But, I am not talking about trillions. But, what about 1 billion slowly released over the year. I mean our economy is based in multi-trillions. So a release of funds shouldn't be so dramatic. For example they made they extra dough to pay for some Katrina repairs.

Like I said before. I know their is a easy reason why they can't. Just curious.

 

[RobertR]

You think they don't already? What's magic about stopping at a billion?

 

[LDfan]

I don't know the real answer but yes, it would seriously deflate the value of the dollar and could trigger inflation (even hyper-inflation).
Years ago the gov't would only print enough currency that would match the amount of Gold the gov't had but I think Nixon took us off that.
I'm sure someone with an Economics background will gives us a good answer to this question.

Jeff

 

[RobertR]

More on hyperinflation:

http://en.wikipedia.org/wiki/Hyperinflation

Printing more money to pay off debts has this effect to a greater or lesser degree, depending on how much it's done.

 

[Greg Dorsey]

The short answer is there’s nothing to stop our government from just printing money. In fact, M3--the broadest commonly followed measure of our money supply has risen more than 40 percent in the last five years to $10,240,300,000,000. Yeah, $10,240.3 billion!

You’re right, printing more money simply debases the currency already in circulation (meaning greater inflation). A little at a time isn’t really noticeable, but as the saying goes, “A billion here, a billion there…”

Greater inflation has its appeal to politicians since we can pay off our astronomical government debt in cheaper dollars. Our National debt (debt owed by Federal Govt.), incidentally is up 44 percent in the last five years to $8,170.4 billion!

Print too much money and you get hyperinflation, as was the case in much of Latin America in the 1980s. That may be why the Treasury will no longer release data on M3 money supply after this month, despite all the talk of greater transparency out of the Federal Reserve.

 

[ChristopherDAC]

Technically speaking, under the Federal Reserve Act as it has been amended down to the present time, incorporating sections of the Gold Reserve Act of 1934, the limit on the issue of Federal Reserve Notes, which are the most common form of currency in circulation, is the sum of the following: the total public indebtedness of the Federal Government, which is increasing at the rate of more than a thousand millions daily; and 2.5 times the total amount of gold in the United States, valued at approximately $45 per ounce. The latter condition assumes that the Federal Government excercises its right under the [flagrantly unconstitutional, to my way of thinking] Gold Reserve Act, to confiscate all the gold in the country, and uses the gold as reserves against rediscounts of short-date commercial paper.

The limit on United States Notes was for many years fixed at approximately $150 000 000, but in the past few years they have been withdrawn gradually from circulation.

In practice, once one has admitted the power of the Government or some private entity [the Federal Reserve Banks are private corporations; no shares are held by any government] to issue irredemable legal-tender paper currency, there is no limit to the extension of the issue. What is perhaps worse is that most countries today embrace the Keynesian economic theory, which asserts that saving money is bad because it reduces current consumption [never mind that it also provides the capital needed for production to supply future consumption], and that you can make everybody rich by printing enough money, as long as you do it slowly enough that they don't notice that their savings are becoming worthless.

 

[Mort Corey]

Some would call it counterfeiting.

Mort

 

[Bob McLaughlin]

Paper currency is actually a very small percentage of the overall national money supply nowadays. Billions if not trillions of dollars of electronic transactions occur every day without any money exchanging hands. Mostly it's just us consumers holding cash.

And also, how would the government introduce the newly printed money into the economy? Give it away? Who would decide how it was disbursed? This isn't something you can just do behind everyone's backs. Everything has to be accounted for and budgeted. The government must borrow from foreign banks or issue bonds when it needs cash.

 

[Mark Dill]

This question is a very good way to stimulate a deeper understanding of how our economy really works.

The problem of the printing-extra-money scenario becomes "Who do you give it to?" Do you just send a fixed amount of money to every taxpayer? If everyone's money supply increases, then the total money supply has increased and that does nothing except make prices go up - inflation. How does this work???

Break it down to the extremely simple - imagine that we are all banana farmers. If we need to buy clothes, we take our bananas down to the clothing store and exchange them for clothing. Now suddenly there has been a great rainy season and we all have twice as many bananas as we had the previous year. So you think, "Great! I should be able to exchange this for twice as many clothes!" So you head down to the clothing store with your huge basket of bananas and find out the store's clothing to banana exchange rate is terrible compared to last year. You complain to the manager and he says, "So you have more bananas - everyone has more bananas! There is so much demand for my clothing because of all these bananas that I had to raise my prices just to keep from selling out faster than I can bring in new inventory." You say, "But don't you end up with a lot more bananas than last year, even though you're not selling any more clothes?" He says, "Yeah, but the banana exchange rate is down all over so it doesn't help me any."

That's exactly what would happen to our money. An increase in demand, with supply remaining constant, causes prices to go up - which we call inflation.

The money supply is actually a reflection of the amount of work being done in our country. Work + profit, actually. Forget all this nonsense about the gold standard - that's ancient history in economic terms. If you're gonna print more money, there's gotta be something behind it - either work or profit. Here's where the magic happens in our economy:

Jack has an idea - he thinks a lot of customers would pay good money for widgets. He can buy the parts for the widget for $1 and he can pay Bill $2 to build each widget. Bill would happily build the widgets for $1 per unit but he negotiated a good rate with Jack - that's $1/unit of CREATED wealth so far. Now Jack sells the widgets to a wholesale distributor for $15 per unit. He also pays $2 per unit in marketing expenses. That's $10 in created wealth (created into Jack's pocket) plus companies are making profit on Jack's marketing expense, so that's another $1 per unit created wealth. The distributor sells the item to a retailer for $17 per unit. The retailer sells it to Bob, the customer, for $20 per unit. Bob has always wanted a widget and he would have happily paid $30 for one, so he considers it a good deal. Through this whole process, we have $27 of wealth created out of thin air. Add up everything like this that is going on in our country throughout the whole year and you end up with the GDP.

That's what people don't realize - it's not just an exchange of goods and money, back and forth - we are continually creating wealth. And we destroy wealth too - depreciation, anything that you buy that you can't turn around and sell, etc.

Once you have a better understanding of what our money supply IS, and WHY it is what it is, then it becomes easier to dig into the deeper questions. Here's one: what would happen if the government just printed a whole bunch of money and paid off our national debt with it? Well, the first problem that you have is much of the debt is held by Americans in government bonds. They want to earn interest on those bonds, they don't want 'em paid off right now. By paying off all of them right now with nothing behind the money, all you've done is added more bananas - just like the original question. So what if you just paid the international debt that way? Well that's even worse - now you've given all the other countries tons more bananas and now the dollar goes to squat in the international exchange rates.

Basically, it's fine to increase the money supply - as long as our production increases with it. That's how you keep the dollar from losing value. Just remember work + profit = money supply.

 

[RobertR]

Ultimately, money is NOT wealth. Wealth is the goods and services we produce. Money is just the medium of exchange we use for the goods and services we want. Increasing the supply of money doesn't magically make more goods and services.

 

[ChristopherDAC]

Except, of course, that that's not how it actually works, for two reasons. The first is, as the Bullion Commitee so wisely observed, that no individual or group can know enough about the operations of the economy to manage the currency effectively for a prolonged period of time. This was the point behind the Gold Standard: it wasn't arbitrary, but rather an attempt to set the value of the money unit equal to a fixed quantity of a commodity whose value would fluctuate only slowly, and would mostly be influenced by the general level of prosperity, thus maintaining a constant price level automatically. The so-called "quantity theory" has relatively little to do with it; Friedman's quantity-velocity model is more just, but in a classical system there are mines and non-monetary uses, so that gold can flow into and out of the system, and its value depends principally on the cost of production. The second reason is that of "Government economic policy"; for more than seventy years now, there has been a deliberate use of manipulation of the money supply to attempt to produce certain specific economic effects. In general, it hasn't worked: price levels have increased by at least a factor of 4 [10 if you look at the gold price, which was artificially depressed and thus not a good indicator] since 1975, but the American standard of living has actually fallen — contrary to the tenets of Keynes and his ilk, who claim that inflation stimulates the economy. RobertR's comment reflects the classical understanding, and I would maintain that it remains correct. Certainly Spain managed to bankrupt itself by mistaking gold for wealth, which actually has an intrinsic value [as opposed to paper money]!

 

[RobertR]

Also, the supply of gold cannot be manipulated arbitrarily by Government to finance whatever it decides it wants to do (really, inflation is just another form of taxation). That's really why governments despise the Gold Standard so much. It's hard for most people to imagine, but if currency had to be completely backed by gold, as we produced more and more, prices would be falling over time (because of the lack of arbirtrary increase in money), not rising.

 

[Todd Hochard]

Someone correct me if I'm wrong here, but the budget deficit *IS* an increase in the money supply. They certainly have the dilutive effect on purchasing power.

 

[Mark Dill]

Eh... sorta - they are increasing the private money supply, but as long as they have it on the books as a debt the govt has to pay back gradually, the total money supply remains the same. And the govt has to pay back that debt by collecting tax revenue from ... who? PRIVATE citizens - so it all balances out in the end. You could say they are increasing the money supply in the same way any lender is increasing the money supply. But really they are just exchanging time for money.

 

[gene c]

Isn't there also a correlation between the population and the money supply? I would think there must be an increase in money supply as the population increases. As more new people enter the work force increasing the GDP, as well as purchasing more things, there needs to be more currency to fasilitate these new transactions. Yes, no?

 

[RobertR]

There is no necessary correlation between the money supply and population. You can't assume that an X% increase in population increases the demand for money by X%, any more than you can assume an X% increase in the demand for DVD players, pistachios, nylon stockings, or anything else. The market (should) determine how much money is needed and what its price should be (ie ability to purchase goods).

 

[gene c]

I guess if all those new people contributed nothing to society there would be no need to increase the supply. Most likely, they will contribute and eventually sales of dvds and nylons will go up. And so too the supply of money. Or, maybe not? But they have to make sure there is enough to go around. Not too much, but enough.

 

[ChristopherDAC]

If you read the Bullion Report, the Select Committee goes into great detail into the mechanisms by which demand for ciculating medium [i.e. money "M1"] can be increased or reduced by various circumstances or conditions. If the population increases, but currency is economised on by the use of cheques and so forth, then the demand for "money" in that sense may not increase. The necessary quantity of money is impossible to determine a priori, and in the case of a forced currency since quantity and other effects determine its value, nearly impossible to adjust in practice.