In my previous post on this subject, I noted that the US government just printed $15.2 trillion in new money. It used that money to bail out the insolvent banks and financial firms. Specifically, it used that money to buy up $15.2 trillion worth of crap mortgage securities that were on their books. So it bought $15.2 trillion worth of worthless garbage. How did the government come up with $15.2 trillion to bail out the banksters? It simply printed the money, that’s what it did!
Now, in my previous post, I asked why printing $15.2 trillion did not cause inflation, recession, messed up balance of payments, etc. It didn’t cause any of these things. None of my commenters even answered the damn question. All they did was tell me that printing money causes inflation, recession and bad balance of payments. Did they answer why it didn’t in this case? Nope. So I’m going to keep on asking you guys the question. Ok?
Why didn’t it cause any of these things? Is it because we traded the money for $15.2 trillion in assets, and therefore did not really increase the money supply? If we printed $15.2 trillion more, and instead used it to pay off the national debt, something which I may well advocate, why would this cause inflation, recession and bad balance of payments if the previous printing round did not?
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Are they really getting the equivalent in assets? Let me put it this way, say the government decided to print $100 to buy something supposedly worth $100 (some asset). Let’s also suppose that a private person wanted to buy the same asset. The seller could start a bidding war which could cause over-payment now that more money has been introduced into the system. This is inflation. Scale upwards and you can see what happens when quantitative easing happens.
I’d like to mention something about the gold standard here, if I may, Dear Sir,
I disagree with him that the Fed should be abolished. Although I do agree that it should be audited.
Paul wants our money to be backed by gold. The problem is that then we as a country are only worth as much as the gold that can be dug by us or given to us via trade. There would also be a rush on S. African gold mines.
A better solution would be to make the Fed more transparent and to make it a public organization; keep the Fed intact but disallow if from engaging in quantitative easing. No new money should be printed out of thin air and loaned out, unless the Fed does so in very tiny amounts as to replace money that has been destroyed (e.g. $100 bills that have been destroyed do to age). This would work against inflation and force the government to raise taxes for foreign aid or redistributive programs instead of printing money and lending it out to Wall Street/big banks.
Perhaps this is of interest: http://www.thestreet.com/story/11224917/1/a-huge-housing-bargain–but-not-for-you.html
Its emblematic of the cronyism, collusion, Wall Street and big bank capture of the government through campaign funding and transfer of high-ranking officials from/to Wall Street/big bank to/from the Federal Government.
Great reply. Thank you.
To Shawn:
Its emblematic of the cronyism, collusion, Wall Street and big bank capture of the government through campaign funding and transfer of high-ranking officials from/to Wall Street/big bank to/from the Federal Government.
I would agree…and unfortunately… there has been little change from the GWB days to Obama.
Matt Taibbi has been doing a pretty good job of documenting some of the corruption and collusion between Wall Street and the US government:
http://www.rollingstone.com/politics/blogs/taibblog
To Rob:
It used that money to bail out the insolvent banks and financial firms. Specifically, it used that money to buy up $15.2 trillion worth of crap mortgage securities that were on their books. So it bought $15.2 trillion worth of worthless garbage. How did the government come up with $15.2 trillion to bail out the banksters?
If you mean this:
http://money.cnn.com/2010/12/01/news/economy/fed_reserve_data_release/index.htm
Note the claim:
The amount of cash being pumped out to the financial giants was not previously disclosed. All the loans were backed by collateral and all were paid back with a very low interest rate to the Fed — an annual rate of between 0.5% to 3.5%.
If the Fed loans money and then it is paid back… it is not money printing. Basically they back stopped many financial institutions so the banking system wouldn’t collapse. Have they bought (and still hold..) dubious financial assets..?
Yes.. but the figures are much lower.
http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html
And some of the money has been paid back.
A more accurate read of money printing would be the figures for the US money supply:
http://www.federalreserve.gov/releases/h6/hist/h6hist1.htm
I am all for printing more money to ding the national debt cycle…So long as some seriously increased governmental regulation and protectionist trade practices are also instigated.
The problem is, our leadership has such a “Laissez-faire” attitude, that printing more money against the debt alone, will not fix the problems long-term.
The U.S is in a economic death-spiral, and it’s empire is on the way out. The “change” has to be across the board. Printing more money would just would part of the solution.
I.E, I would advocate this, amongst a WHOLE LOT of things.
To The Sandman:
So long as some seriously increased governmental regulation and protectionist trade practices are also instigated.
The guys who run Gibson Guitars should have obviously become Wall Street Bankers… importing wood legally which may or may not have been illegally logged (but was sanctioned for export by the Indian government..) ?Shut em’ down!
http://www.youtube.com/watch?v=O_-taqM5Sk0&feature=share
Depressing… note that the CEO states that Gibson Guitars has hired over 500 US workers in the midst of the recession.
I will try to answer your question Robert.
Normally, printing money causes inflation. There are some conditions under which printing money will NOT cause inflation, one of which is during a recession (which we are in). However, if the economy were to ever rebound, you would then get inflation. I’ll use a simplified model to try to explain this, but the real economics are far more complex. If this explanation doesn’t suffice, I will try to explain with a slightly more complex (and accurate model). But that’s going to be a nightmare for me, so I’ll start with this…
Suppose you have an economy with an output of 10 units/year (whether that be physical goods, or services). And you have $100 in circulation. Each unit will end up costing $10 ($100/10 units = $10/unit) based on demand. You will tend to not sell for less than $10/unit because you will learn that you can charge more based on demand. Conversely, you will tend to not sell for more than $10/unit and have a surplus of 1 unit with no buyer, unless you have a monopoly of all 10 units (so you can artificially set the price at whatever you want).
Because we no longer back our currency with gold–we use fiat money–we are able to print money without a corresponding increase in our gold supply. So suppose you print $900, so that $1000 is now in circulation. If the economy’s output is still only 10 units, each unit will now move towards a price of $100/unit ($1000/10 units = $100/unit). Each dollar buys less product and is therefore worth less. This is known as inflation.
If this hypothetical economy is able to expand its output to 100 units, you will not get inflation because $1000/100 units = $10/unit and each dollar will still buy you the same amount of product.
The reason that printing money during a recession also does not cause inflation is because people will tend to save money during a recession. That is, they lock it away rather than using it to buy goods. Therefore, even though there is more money in existence, it is not actually circulating throughout the economy. But when the economy rebounds, this money will be released and each dollar will be devalued again (inflation).
You asked the question, why don’t we just print more money to pay off our debts, build infrastructure, etc? Well, the truth is we do! Our government has been doing that since the 30s when we decoupled our currency from gold backing. The reason our economy hasn’t collapsed from hyperinflation is because #1) our economic output of units has increased and #2) other countries have always backed the dollar–Japan in the 80s, and now China since at least 2001 when they joined the WTO.
That is why we owe China almost 1 trillion dollars. We print money to pay off our annual trade deficit, which the Chinese then reinvest into our economy in the form of American treasury bonds. We print even more money, which they continually reinvest into our bonds. This is how our national debt has skyrocketed so quickly. Has there been inflation? Absolutely. Don’t quote me, but I believe $1 in 1970 is worth $20 today. This can only occur in our world economy because we are on a fiat currency system, allowing us to print money willy-nilly. On a gold standard, trade deficits are auto-correcting as the corresponding devaluation of the dollar relative to the yuan will make our products cheaper, driving us towards a trade surplus economy.
The US Dollar is just a piece of paper. It is backed by the promise of our strong economy that we will pay back our creditors. But if our creditors, esp China no longer trust the value of our currency because not enough American consumers can continue to purchase their products, they will begin dumping their American treasury bonds into the market. At first, other countries will be eager to purchase, but the availability will drive down the value of these bonds, and therefore the value of the dollar. This will decrease our credit rating (i.e. our credibility to pay back our creditors), which will in turn cause hyperinflation of the dollar until no one will allow America to borrow any more money. Our economy will stagnate just as Germany’s did before WWII, as we become economically isolated. Recall how Germany also printed money to pay off their WWI reparations.
As far as I understand, the 2008 subprime mortgage crisis is an example of a housing bubble. It popped because inflation outpaced homeowner wages. We are in the midst of a debt bubble, the popping of which would likely cause a collapse of the dollar.
Also, countries like China and Japan who have the largest holdings of US treasuries will not dump the dollar because American demand is greater than domestic Chinese and Japanese demand. Therefore, it is in their best interests to also keep the dollar valuable relative to their own currencies, which makes exports cheaper.
See, the Japanese, being so few in number were never in a position to beat our economy. Their export economy is dependent on American consumers. However, this time around with China, if they can increase domestic demand or even local demand in markets like Indonesia, they will allow their currency to appreciate and begin dumping US treasuries causing a corresponding depreciation (inflation) of the USD.
I know I went on a tangent, but economics is a complicated topic.
Well said Josh! Totally understand it better now, thank u