This post was originally made in the now closed DiscussEconomics forum.
I signed up because we are having this specific argument at work, and I’m wondering if anyone here can provide some educated insight.
So, the argument is this… instead of taxing our income, why doesn’t the government just print more money to pay for what it needs? We keep our whole income, and the hypothesis is that it equals out in the end. The value of the dollar would go down over time, but the income would go up.
Now, intuitively that just seems wrong to me. It feels like this would have a non-linear effect of massively devaluing the currency such that it would soon be worth nearly nothing. I don’t know how to prove this one way or the other though, hence my posting here.
Anyone have an informed opinion on this?
You are right, your coworkers don’t know anything about economics 😛 Look up more informatino on purchasing power parity for some theoretical insights.
Think about it, if you gave a million bucks to everybody would that make anybody better off? Would everyone run to the store and buy out all the goods? Well they wouldn’t you know, the government can’t just give money from thin air if there is nothing to support it. Giving one million to everybody would mean everyone is in the same position (real position) they were before. Prices would increase to reflect the new devaluation of the dollar. Furthermore, you would see all investment (foreign) pull out in a hurry since their holdings of your currency are all of a sudden worthless. If there is nobody buying up your dollars (or selling them for that matter) the money supply increases even more and devaluation keeps going down. So what does the government try to do? They increase interest rates so people will buy back some more dollars, but it doesn’t really matter anymore because you just printed out of thin air………… The government gets it’s money from taxes or investments (bonds). You can’t just print money since the actual money is only paper, there has to be something to support it.
An appropriate increase to the money supply would devalue the dollar only enough to encourage an increased demand for American goods and services as exports. If the demand for exports increases, America creates jobs, the unemployment rate goes down and confidence is restored. Banks are then more willing to lend to creditworthy borrowers (individuals and institutions) because of the export demands. Therefore, increasing the money supply supports Americas current financial needs because it creates jobs. As unemployment declines, the housing market will slowly recover because of increased lending to credit worthy individuals. Training and education are essential to meeting the export demands of other countries. One more round of quantitative easing may be the answer to getting the train back on the tracks.
Thanks, that helps a lot. Let me see if I understand completely…. is the *only* issue that the dollar is being devalued in investments (both foreign and domestic)? Say if there were no foreign investments to complicate things, and we were dealing with some closed domestic economy… is it possible (mathematically), that the increase in income could theoretically keep up with the inflation. Say, if the government would print only *exactly* the amount of money that it is missing out on, since it’s not collecting taxes… would our increase in spending money and the corresponding devaluation of the dollar cancel each other out (at least).
For example, the price of bonds goes up, but we have more to spend on those bonds?
It simple doesn’t work that way (post-war Germany is an example of massive hyper-inflation. They increased and printed so fast the economy could not adjust and people just stopped accepting the money as currency.)
You can’t just print and add to income, goods will increase by the same price. You adjust your wage based on inflation, not the other way around. You say, “inflation was 3% this year so pay me more to cover that.”
the ONLY issue isn’t the foreign exchange but it’s a big one. The government can’t print money that it needs because that’s not responsible in a developed economy. You need people to ensure those decisions aren’t made 😛 This doesn’t meant they don’t print money but it’s done with a number of considerations in mind. Spending would not increase because inflation would increase as well, nobody is better off.
When the price of bonds goes up that means the interest rates are going up meaning you get a better return in the end so you do get something.
First because the rights to “print money” has been given up by Congress to the Bankers in 1913 with the Federal Reserve Act
so that Gov must ask the Bankers if they may wish to do so. Bankers are pleased to do so as long as we pay them interests with our taxes (or taxes of our children).
Second, as a consequence of the first, if ever a President tries to take back the Power of Printing Money, there is some Probability that he will be shot as History showed with President Lincoln and less famously with President Kennedy who tries to repel Federal Reserve with Executive Order 11100
$2 and $5 “Kennedy dollars” actually circulated (picture below) but after Kennedy was buried, President Johnson ordered them to be retired:
Feds can get more money by asking the banks like you said, however, that does not necessarily involve printing more. What you describe is a clearing of bank reserves. But thanks for the rest of the info, and welcome to the board!
I think the government printing exactly the amount of money that it needs to pay for its operation is impossible. As soon as it starts trying, the nominal price would start to go up and it’d be chasing the price up as it kept printing–meanwhile, all of our prices would also go up, and we’d feel it hard as the money took time to come around to the public sector. And, by then, the currency would be so devalued we probably wouldn’t want it anymore. Are you trying to make us convert to the Euro? Tongue
Though, this is a tactic used by smaller countries when they try to cover their internal debts. The result is always bad.
The appeal to print more money is sometimes great, especially in underdeveloped countries (economies). It doesn’t happen as often as people think. Reserves from the bank are tapped rather than printing.
It is a fairly rare occurrence nowadays, but I was under the understanding that it used to happen quite a bit more.
Not that I’m sure, as I haven’t looked into it, but I thought it tended to happen with more militaristic nations as they tried to fund their army.
I have to clear up something here. The Fed has no reserves, it creates money as debt. That’s why the government has to go into debt in the first place. The government “sells” T-Bonds to the Fed for “money” the Fed creates, then the Fed either keeps the bonds or auctions them off to the primary dealers. But it doesn’t have to be this way.
According to the Constitution:
Article I Section 8
Congress shall have the power:
To coin money, regulate the value thereof
The Fed was created to allow private banks to create our money and then loan it back to our government at interest. The income tax was created so that we have to pay that interest back to the banks.
There is no reason that the US government can’t issue legal tender money without having to pay interest, except for the treasonous Federal Reserve Act of 1913. It has in the past, and an act of Congress can allow it to again.
By the way, “printing” is an archaic notion. 99% of money these days is created through making entries in electronic ledgers, i.e. computer files, as new “assets” in commercial bank accounts as a result of loans to businesses and consumers.
This is all very interesting… I never knew how the federal reserve came about, or what precisely it’s purpose was. So, the fed is a federal institution yes? You say that the banks control the money (and they control the interest rate also, yes?), has it ever NOT created more currency when congress asks? How often does this happen, if ever?
It’s purpose is to fleece the American people by having private bankers create the money instead of the government doing it. It’s what they call a “quasi-governmental” agency, although it is owned by the member banks(e.g. Citibank, Chase, Bank of America, etc). The actual interest rate we pay is set by supply and demand, basically from the Treasury auctions and the bond market, although the Fed tries to influence it by setting the various rates it controls. Congress simply spends more than it gets in taxes and the money is created by the Fed buying T bills, so no. Congress does set a limit on how much debt it can create, but they frequently raise it. Right now it’s $9 trillion. Shocked
Congress raises its own credit limit
But the real money creation happens at the commercial banks. From the New York Fed’s website:
So really, money is created every time a loan is made and destroyed whenever a loan is paid back. 95% of money works this way, the government and the Fed have only a little influence on it.
Of course, we the people of the United States could petition our Congress to return to a system where the money is created by government permanently and without interest, but we the people don’t have enough money to buy our Congress back from the banks. Unsure
It’s really quite a racket, creating money out of thin air then charging interest on it.
There’s a cute little video on the whole process here: Money As Debt
The FED dictates the interest rate, banks DO NOT.
Also, these Two posts that are related to this thread:
http://www.discusseconomics.com/banking/where-do-banks-get-their-money/
and
http://www.discusseconomics.com/banking/money-creation-where-does-the-money-come-from/
just wanted to offer Zimbabwe as another example of a country trying to print itself out of a financial crisis. The central bank has become caught in a hyper-inflationary spiral, and it just can’t print money fast enough to keep up with rising prices.
What happens is that as the local currency becomes practically worthless, the economy becomes reliant on foreign exchange (such as South African dollars sent as remittances from relatives working in SA). People also revert to bartering for goods (I’ll paint your house if you look after my kids over the weekend).
I wonder if a Zimbabwean dollar is actually worth less at the moment than the paper it’s printed on. It would be interesting to know if merely printing the seal of the Reserve Bank of Zimbabwe onto some paper ends up massively devaluing that sheet of paper.
If the stated value, of “Federal” Reserve notes, declines enough with respect to copper and nickel, the 1946-2009 nickels, composed of cupronickel alloy, could completely disappear from mass circulation.
According to the “United States Circulating Coinage Intrinsic Value Table” available at Coinflation.com, the March 29th metal value of these nickels is “$0.0588943” or 117.78% of face value.
I have made this point also, in one sense it does not matter, taxes, debt or printing money. It all will have the same effect on the economy, that is reduce the productivity of the private sector. Of course the latter is the least desirable because of the effects it has on market stability, however, the main effect all these policy’s have is it ‘crowds out’ private investment. The government says they know how to spend money better than you. Printing money or debt or taxes will all cause a crowding out effect.
One difficulty for policymakers lies in how to measure the relevant money supply. There are several different methods, reflecting the different LIQUIDITY of various sorts of MONEY. Notes and coins are completely liquid; some BANK deposits cannot be withdrawn until after a waiting period. M3 (M4 in the UK) is known as broad money, and consists of cash, current account deposits in banks and other financial institutions, SAVINGS deposits and time-restricted deposits. M1 is known as narrow money, and consists mainly of cash in circulation and current account deposits. M0 (in the UK) is the most liquid measure, including only cash in circulation, cash in banks’ tills and banks’ operational deposits held at the Bank of England.
Although it is a poor predictor of inflation, monetary growth can be a handy LEADING INDICATOR of economic activity. In many countries, there is a clear link between the growth of the real broad-money supply and that of real GDP.
It simple doesn’t work that way (post-war Germany is an example of massive hyper-inflation. They increased and printed so fast the economy could not adjust and people just stopped accepting the money as currency.)
You can’t just print and add to income, goods will increase by the same price. You adjust your wage based on inflation, not the other way around. You say, “inflation was 3% this year so pay me more to cover that.”
the ONLY issue isn’t the foreign exchange but it’s a big one. The government can’t print money that it needs because that’s not responsible in a developed economy. You need people to ensure those decisions aren’t made This doesn’t meant they don’t print money but it’s done with a number of considerations in mind. Spending would not increase because inflation would increase as well, nobody is better off.
When the price of bonds goes up that means the interest rates are going up meaning you get a better return in the end so you do get something.
My main problem with “printing money” is that it bails-out debtors, while penalising those who have saved and lived prudently. This is a major issue of Moral Hazard given the UK’s pensions time-bomb, a problem which I believe the US (and most western coutries) shares as well.
If you save enough retire on a decent income of £20,000 per year, and the government prints a shed-load of money so prices multiple 10x, then you have only £2,000 worth of spending power.
You have been mugged, while the reckless spenders (who spent their money on fast cars and holidays) get support from the government (at workers/taxpayers’ expense). Is that just?
Here some additional sources. Written in plain English
Murray N. Rothbard:
Mistery of Banking
Case against the FED (historical overview)
What has government done to our money?
Guido Hülsmann: Ethics of Money production
Mises (advanced literature): Theory of Money and Credit
a lot of this sources are avaiable for free at mises.org
extremly telling chart about how the FED devalued the Dollar since 1913: http://mises.org/images/SeanMaloneRiseFallDollarMedium.jpg
The government sould be able to print money into the economy at a steady rate on specific projects such as hospitals, education etc.
Banks are effectively creating new money via accounting procedures in the banking system.
Therefore we can say everyday the finacial system(banking system)is printing money (counterfeiting money would be illegal for any other person,…. then why is not illegal for banks)
For more info about why we need monetary reform look at the websites below:
http://www.bankofenglandact.co.uk/
http://www.bendyson.com.co.uk/
Just a thought, as the inflation occurs those who previously had more dollars at hand will face more serious loss. This would spawn a massive demand for commodities, with people holding dollars to exchange for them. And since inflation is bound to happen literally every moments under such money printing policy, one will typically be reluctant to possess money.
On the next stage, our government-issued printed money will sure be out of circulation,due to a lack of demand for it in the market, since no conscious person will exchange for things bound to devaluate.
Printing more money does not help produce a stable economic stimulus for a number of reasons
1 Increasing money supply will cause the value of the currency to fall so people would not use the valueless money as a medium for exchanging goods /services.
2 When an increase in money supply is not anticipated by business – there is no extra products to buy – so the extra money must flow into creating higher prices (money supply pull inflation) harming those on low & fixed incomes the most. This caused the social unrest that allowed Mr Hitler to come to power to murder millions of people.
3 Because Governments do not how to invest they squandered all their money so have to borrow money from the banks which print money out of thin air and charge interest for the privilege. This is why Bank of England notes bare the the words “I (the Governor of the Bank) promise to pay the bearer on demand the sum of” – just like other IOU’s – since 1600. The American President sold the right to create the money supply, back in 1913, to those responsible for creating the 1911 run on the banks (causing millions of people to loose their life’s savings) and allowed them to create the IRS to insure they got their interest payments.
4 Most of the stimulating effect of increasing money supply will be lost from the economy because most people do not know the difference between spending and investing (as the Government education system does not teach it) so squander it on buying stuff from abroad in the hope it will make them have the internal feeling of happiness.
5 Printing extra money will only give a temporary benefit when the market does not adjust to the rational fact that extra money reduces the value of money (the stock market took over two years to adjust to the zero value of companies with zero customers in the dot com bubble) or that printing money causes your taxes to rise as borrowed money needs to be paid back with interest.
The smarter way out of the mess caused by practice of funding current lifestyle with borrowed credit (bad debt) is to either use good debt (borrowing to buy assets – eg investment properties or real education, giving a higher return than the cost of finance) or use another form of money – there were over 3000 in use in the USA during the previous Great Depression – to encourage those activities adding value to society.
Printing more money is needed.
As population is growing and demand is expanding, the society need more money in circulation. But the existing money has gone to the minority of the rich and famous who keep the money for future generation.
If no more money left in the society, more social functions will disappear and most people will keep poor forever.
so the government need to print more money to ensure the social stability.
bu
The argument against printing money is crap. “Inflation! Inflation!” Nonsense. Money printing does not cause prices to rise, it does not cause the devaluing of the monetary unit… I’m not sure how this myth ever got started. We all need to recognize businesses cause prices to rise (i.e. inflation or in other words dollar devaluing) because they believe there is sufficient demand to allow for it in an effort to increase their profits. If the Treasury or the Fed prints money during periods of higher unemployment which is then wisely distributed to spenders, this will increase demand. Increased demand when demand is insufficient to support full production is exactly what businesses and the country needs. Revenue starved businesses will just be happy to be healthier. Raising their prices won’t occur until demand is high enough to support it.
For the skeptical let’s use a simple example:
Suppose you have a business which can produce up to 100 items per month. Now suppose because the economy is suffering you are only selling 50. Your business is at half of its potential production output. The business is very likely suffering and is certainly nowhere near where it would like to be. Now suppose the government prints money and distributes it such that it ends up in the hands of your potential customers, at which point demand for your product goes up to say 60 units. Are you now so fat and happy you feel as though you can raise your prices? Of course not, you don’t want to jeopardize losing the increased sales to your competition; you’re just happy to be selling more. And you aren’t going to feel comfortable in raising your prices until you get much closer to full production. If the government keeps printing money and you move to 70 units, then 80 units, then 90 units, your business is healthy again. The government then simply stops printing, or at least prints a lot less. Problem solved.
It is too much demand which creates rising prices. The problem with money printing is in the context of a healthy economy–when businesses are at or near full output–you can then create an environment where businesses feel safe in raising their prices because of this excess demand. Going back to our example above, if you are at 90 units and the government keeps printing, let’s say you get to full production of 100. Now suppose the government continues to print money and you have more customers than you can make products for. You could in theory expand to try and meet the demand excess. But expansion can only go so far, so suppose you are at full production *&* full expansion (or suppose you just don’t feel like expanding being content with the business’ current size). Now you see the opportunity to raise your prices in an effort to increase your profits. If you lose one sale, what do you care, there is another waiting to fill the shoes. The bottom line is, until businesses are comfortable enough (i.e. healthy enough which is to say they are at running very profitably and aren’t worried much about the repercussions of raising their prices), prices aren’t going to go up much if at all because of money printing. Money printing is merely going to increase demand, and that is what we need. We just need to worry about increasing demand too much, which is well down the road of recovery.
If you gave everyone a million dollars would everyone be better off? No. Of course not because everything would comparably more expensive. You need to research something called money supply. Printing money increases money supply and your purchasing power decreases. On a macro scale all the inputs for your favtory will cost more and you will ahve to pass that along to your customers.
I have read many reasons on why we don’t print more money. I understand that some people would just blow it and retailers would raise their prices as well as the manufacturer. This is where we need control from our government. Retailers and manufacturers will not be allowed to do this and punished somehow, if they do. Because of what we have endured in the last few years most people would pay off thrir debt and save it for a rainy day because we’ve had plenty. I remember when inflation started and it all started because of greed. It may hurt for a while but we need a heavy hand controller. Much like a parent would jerk a kid up to set him back on the right track and keep things from getting out of control!
I know its a long shot, but I think the eventual solution will be electronic money. This way, when more money is injected into the economy, it won’t make notes obsolete as the result of too much inflation.
1st.: Of course printing money causes inflation in the long run. Its not really that debatable
2nd: Inflation could be considered the most fair and economically efficient tax there is. It encourages people to invest because if they do not, they loose their fortunes. It keeps our economy active, and makes it more difficult for the big players to stay on top without being constantly looking for newer better ways to invest. It encourages people to “use it or loose it”, which levels the playing field of opportunity. If currency was electronic, we could also tighten the control of currency trading and mitigate any negative effects of inflation regarding the international markets.
3rd: If we took away income taxes and solely taxed with inflation and property taxes (to advert the US from becoming a giant monopoly game) there would no “tax loopholes” as far as capital gains goes. I think banks shouldn’t be allowed to borrow from the gov either (its a quite unfair advantage over alternative borrowing/investing schemes really).
I know we are a long way off from doing this, but I believe if we did we could create an economy that would allow for a healthy constant turnover of wealth from those who have become more complacent and inefficient to those who have the drive to get it. I feel opportunity for the young and innovative has become quite lacking in our current system and the elderly have amassed much wealth which is being squandered on health care and inefficient entrenched corporate systems.