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

todd s · 03-10-2006, 09:56 AM

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 · 03-10-2006, 10:19 AM

Quote:

Why can't they just print more?

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

LDfan · 03-10-2006, 10:22 AM

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 · 03-10-2006, 10:33 AM

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 · 03-10-2006, 10:46 AM

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.

**HTF Ads**

ChristopherDAC · 03-10-2006, 11:39 AM

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 · 03-10-2006, 12:12 PM

Some would call it counterfeiting.

Mort

Bob McLaughlin · 03-10-2006, 02:37 PM

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 · 03-10-2006, 03:09 PM

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.