question about printing money

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yoshhash's picture
yoshhash
Status: Martenson Brigade Member (Offline)
Joined: Sep 20 2008
Posts: 271
question about printing money

I have a question, forgive me if it sounds dumb:

Chris speaks throughout the Crash Course and in the updates of "printing money" as the strategy most likely to be pursued by an insolvent government, in present and future tense.  Does that mean that as of yet, they have not begun to do so?  Is that something that is/will be disclosed?  Or is it a secret thing that only shows up once we start seeing clear evidence of inflation?

It seems to me that a certain amount of printing (fresh) money is necessary to keep up with a growing economy, and of course they have to replace the money that wears out, etc.  So I'm thinking that they must be printing money all the time, so it is rather a question of how much, and do they let the public in on this process?  

malpert's picture
malpert
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Posts: 18
Re: question about printing money

In the context of the CC, the Fed "prints money" via the following mechanisms:

 1) Purchases securities from the market in exchange for cash (via FOMC)

 2) Lends cash to the market in exchange for securities (via Discount Window, TAF, PDCF, TALF, etc)

The creation of paper/coin is ironically not "printing money" because the new paper money requested by a local bank would already exist in digital form.  

The idea that printing money is "required" to keep up with a growing economy is accurate only in the context of the Federal Reserve System and Fractional Reserve Banking.   It is NOT accurate as a general law of economics.

Printing money is not a secret.  It is a widely (nearly universally) accepted policy tool.        

 

 

 

 

yoshhash's picture
yoshhash
Status: Martenson Brigade Member (Offline)
Joined: Sep 20 2008
Posts: 271
Re: question about printing money

Thank you malpert. Unfortunately, I'm still not getting it completely- the problem is I'm shakey on the terminology- "securities" and the various acronyms.
But that doesn't matter- I can google it. Hoping though, that you or anyone can still answer my original question of whether or not they have "begun" printing money as a solution, faulty though it may be. Is it something we will read about in the papers, or has it been ongoing, soon to be increased to the nth degree?

By the way, I realize this is in the wrong section, I suppose it should be with "general discussion and questions"- sorry if anyone is annoyed by this.

jkibbe's picture
jkibbe
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Posts: 71
Re: question about printing money

The problem isn't creating money to replace worn out bills, rather creating money out of thin air, which is what the Fed does.  The government can essentially create money by selling debt (Treasury bills and other securities) or have the Fed just create it by willing it into existence.  

If you owned a rare Mickey Mantle rookie baseball card in mint condition, it would have some value relative to other cards.  If someone later discovers a truckload that contains a million of the Mickey Mantle cards, your previously valuable card is now just an almost worthless piece of cardboard.  That's how inflation works.  Most people think that a dollar has a fixed value, but when the government prints more so it can finance its wars, tax cuts, entitlement programs, and bailout programs (i.e. deficit spend), it devalues the dollar by flooding the market with even more dollars than before.

When you read in the news that the government is selling securities at auction, they are essentially creating money.  They offer you a piece of paper that says we promise to pay you back your money plus a (very) little bit on interest at a certain point in time.  The paper itself is worth nothing except the promise that the government will pay up.  In the short term they can raise a lot of money this way, but eventually they have to pay up.  Then it is a continuing cycle of "printing" more money since they'll need more money in the future to cover the interest that is owed, plus the original money was spent on something.  Lately the government has been offering securities at or near zero percent to raise some funds and people are buying them!

Watch the 47 minute video Money as Debt to make better sense of it all:
http://video.google.com/videoplay?docid=-9050474362583451279

yoshhash's picture
yoshhash
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Posts: 271
Re: question about printing money

Ok, I got it now, thank you.  I had already understood why it is bad to water down our currency supply, just didn't understand when and which manner it happens.  So it has been going on at some level for quite a while now.  I had already watched that video, but I guess I missed the explanation of securities, plan to watch it right after I post this.

I just can't believe there are people out there gullible enough to buy these securities.... 

jkibbe's picture
jkibbe
Status: Martenson Brigade - YouTube Channel Admin (Offline)
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Posts: 71
Re: question about printing money

Here's an excerpt from a PDF book (The Alpha Strategy) that I coincidentially found on my hard drive tonight.  I hope it clears things up for you in the event that the video didn't have the specifics you were looking for...

---

When the Fed wants to change the supply of money, it has three tools at its disposal:
1. It can change the banks' reserve requirements. If it raises the amount of reserves the banks must hold
against deposits, then the banks cannot lend out as much of their depositors' money, and the deposits are not
multiplied as greatly in the system. Thus, when the Fed raises the reserve requirement, the money supply
tends to fall. If it lowers the reserve requirement, the money supply tends to expand.
2. It can lend money to banks in the system. This creates a direct expansion of the banks' reserves.
3. It can buy or sell U.S. Treasury securities.
This last tool is the most important way in which the Fed affects the money supply, and the way in
which the Fed is linked to the spending policies of the federal government. To understand where the
majority of our inflation originates, it is essential to understand the link between federal borrowing and the
Federal Reserve.


Turning Federal Debt into Money
When Congress spends more money than it raises through taxes, it authorizes the Treasury Department
to borrow from the public by selling Treasury bills, bonds, and notes. The Treasury offers these securities
for sale at public auction, and they are bid for and purchased by banks, pension funds, trusts, corporations,
individuals, and even foreign interests. These are the safest IOUs around. They are guaranteed by the
government.


Inasmuch as the securities are offered at auction, there is no chance they will not be purchased. The
Treasury offers such a high rate of interest that people are induced to sell their other debt securities such as
bonds, savings accounts, and certificates of deposit, and buy the government IOUs.


Sale of government securities thus soaks up the savings of individuals and corporations. The more
government borrows, the less money there is left over for other borrowers, and so other borrowers must
offer higher and higher rates of interest in order to attract funds. Rising interest rates cause the costs of
doing business to rise, loans are harder to get and, as a result, business activity slows down. Both businesses
and consumers curtail spending, and the economy moves toward recession.


Recessions are politically unpalatable. Idled workers and distraught businessmen hound their
government representatives to do something. What they want is the availability of more money. The only
way the politicians can meet the demands of their constituents is to borrow more money and spend it to
subsidize business, to pay unemployment benefits to the idled workers, or to issue government contracts to
buy products from the distressed companies. The government takes a dollar from one person and gives it to
another as a pretense of fighting the recession. In fact, it makes things worse. Additional federal borrowing
further depletes the supply of available credit and amplifies the recession.


It is widely believed that the Fed is sympathetic with the problems recessions create for politicians, and
lowers interest rates in order to keep those politicians in favor with the public. That is not the case at all.
The Fed is relatively insulated from political pressure and has other reasons to act. A recession means bad
times for the banks. People stop borrowing, corporations lose business, and bank profits drop. When
borrowers get into trouble, banks get into trouble. If the recession turns into a full-scale depression,
widespread bank failures may result, as they did in the 1920s. Since the Fed is an organization made up of
banks, it is clearly in the best interests of those running it to ward off the recession by expanding the money
supply.


When the Fed determines that interest rates should be lowered, or at least prevented from rising any
further, it contacts private dealers who by and sell U.S. government securities, and offers to purchase
Treasury bills and bonds. (Remember, these are the same T-bills and bonds that created the rising interest
rates in the first place by absorbing the savings of individuals and corporations.) The Fed purchases these
government securities and pays for them with a check. That check is given to the private dealer, and he
deposits it in his bank. The bond dealer's bank forwards the check to the Fed (where it has its own reserves
on deposit), and the Fed then credits the reserve account of that bank. Now the bank has new reserves
against which it can make loans. These fresh reserves are just like a new deposit by a customer, and can be
expanded by the same process that all bank deposits are expanded. Under reserve requirements in effect in
early 1980, these reserves can be expanded by approximately six to one; thus, when the Federal Reserve
buys $1 billion in U.S. Treasury securities, the banks can loan out up to $6 billion to borrowers.


Where did the Fed get the money to buy the Treasury securities? It created the money out of thin air. It
credits the reserve account of the bank by a simple bookkeeping entry. What does the Fed have to back up
its IOUs? It has the IOU of the U.S. Treasury, that is, the Treasury bills and bonds. The Federal Reserve
accounts thus balance: they show a liability of the bank reserves and offsetting asset of Treasury securities.
The Federal Reserve Notes in your pocket or checking account mean that the Fed owes you money, and
these are in turn backed up by the T-bills they hold that mean the government owes the Fed money. The
U.S. government continues to issue more and more IOUs to cover its ever-growing deficits, and the Fed
continues to buy these up and issue its own notes in their place.


This whole process is known as monetizing the debt. This means the debt of the federal government is
turned into money. The government borrows money to meet its deficits, and the IOUs it issues eventually
are converted into Federal Reserve Notes in your pocket. Those greenbacks in your wallet that you think of
as money are only government IOUs broken up and reissued by the Fed.


Give it a little thought and you should see that there is no difference in the long run between the
government fighting a recession by borrowing money from Peter and giving it to Paul, and the Fed fighting
the recession by buying up Treasury bills and giving the banks new reserves. The only difference is a time
difference. The effects of government borrowing are almost instantly offset by the effects of government
spending. But when the Fed monetizes the government debt, it takes a year or more for people to offset the
influx of new money by raising their prices. The Fed action just postpones the inevitable a bit longer than
the government action does.


Federal deficits, then, are the root cause of continued inflation of the money supply. Once the banks
have loaned out depositors' money to the maximum limit set by reserve requirements, the only source of
new dollars is the Federal Reserve. The Federal Reserve, therefore, is the real engine of inflation. Its need to
inflate, however, is a consequence of federal deficits.

Barking_Mad's picture
Barking_Mad
Status: Member (Offline)
Joined: Dec 23 2008
Posts: 1
Re: question about printing money

Hi,

I just stumbled on this website and saw this thread.

I'd just like to add, out of interest, that here in the UK the Government has recently altered a 160 year old banking bill which insists that any printing of money be notified by a public declaration. Once passed the bill would do away with this, meaning the Bank of England could print all the money it wished without having to give a total.

http://www.order-order.com/2008/12/something-odd-in-banking-bill.html

 

 

 

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Re: question about printing money

The wise old adage - "follow the money" - leads us to some stark realizations!

wfhyslop's picture
wfhyslop
Status: Bronze Member (Offline)
Joined: Sep 3 2008
Posts: 46
Re: question about printing money

This may sound like a completely stupid question but ... What prevents the Fed from printing an infinite supply of money? It seems that is what the Fed is promising to do with "quantitative easing". I understand this will create inflation (if/when it surplasses debt destruction) but what I cannot understand is how this will result in the "destruction" of the dollar as is claimed by Peter Schiff and many on this site. Yes 45% of US debt is owned by Japan, China, Russia, OPEC, etc but what can they actually do to "destroy" the dollar. They can sell their US treasuries (to whom I am not sure) and the Fed will print enough new dollars to pay for them.

I admit I am a neophyte to international finance but it seems to me that the US as the "reserve" currency has been doing this for years and gotten away with it ... what is diferent now?

Will

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