First off please do not answer this while using circular or self referential arguments. I will elaborate on my OP.
Let’s stipulate the government owes $1 trillion in debt. The government prints $1 trillion dollars and pays its debts.
You say that this can’t be done because the money supply gets diluted by $1 trillion dollars.
So what? The money we have is not backed by gold. The money we have is just a representation of worth. You pay me $1 for a candy bar in my store and I agree to accept a piece of paper for my candy bar. The only reason this works is that you and I both agree that the exchange is even.
So please explain why (as I’ve read elsewhere) that if the money supply is increased, all money is worth less. I would agree if the money was backed by something.
There are only a certain fixed number of candy bars, and everything else in the country, at least on a short term basis. The governemnt prints $1 trillion and distributes it (unequally) by paying off debts. All of a sudden there is much more money chasing the same number of candy bars, and one of two things will happen - all the candy bars will be bought and eaten, or the prices will rise. Experience, such as Germany 1923, suggests that price rises willl be the more common experience. People who didn’t get any money, or people who have cash savings, are much worse off.
In fact even the people whom the government paid off are left feeling cheated - since their trillion dollars isn’t worth as much as they thought it would be. So the next time the government needs to borrow money, how willing will they be to lend it to them?
To elaborate a little on what Eleusis and zimaane have said, think of it this way:
Money’s value is not best determined by the ability to exchange it for a valuable metal like gold (although you can certainly do that), but by the ability to exchange it for goods and services.
Imagine you own a candy bar store (to keep with zimaane’s example). The government pays off all its debts by printing extra money, so now lots more customers can afford your candy bars. Noticing this, you realize that you can make more money by raising your prices, so you do. In fact, you also have to, because your chocolate supplier has noticed the same thing, and raised his prices, and your wrapper supplier has also noticed and raised her prices. The amount you raise your prices is going to be proportional to how much additional money is out there. The gov’t printed a lot of money, so you are trapped in runaway inflation, and any money that people have saved up is worthless; a bank account cannot keep up with the inflation, so savings are destroyed. Lots of damage has been done to economies that way.
Alternatively, think this way:
Lots of means it's really easy to get .
The easier it is to get , the less the is worth.
Have you ever played Monopoly with the “Free Parking” house rule (where the bank puts a $500 bill under FP and a player who lands there gets the money) ?
At the beginning of the game, money is fairly scarce and $500 is considered a lot to pay for a first row (purple or light blue) property. However, as the game progresses and more money is thrown into the game (because all the money the players pay in fines isn’t thrown back into the bank; but back to the players the next time a player lands on FP), the money itself becomes less valueable. Soon $500 bills are flying around the board and every player seems to have at least five or six. So, why should I listen to an offer of $500 for a measly $60 property? I’ve (and all the other players) have plenty of money.
Try playing Monopoly both with the FP rule for a few games and then according to the real rules without it for a few games, and you’ll see the difference.
If you suddenly had an extra $1 million (legitimately) in your bank account, wouldn’t you go out and spend it? (I know I would!)
Now imagine that 4 million people each have an extra $1 million (my WAG is that the total US debt is $4 trillion) They are going to start spending moeny. As soon as businesses start selling out of stuff, they are going to raise their prices. The government could try to keep things a secret, but that would only delay the inevitable price rises.
You don’t need to imagine that the money is based on gold for this scencario to happen. It doesn’t matter.
If the US Govt prints more money and gives it to say Russia to pay a debt, the fabricated money isn’t in the US anymore; it never was in circulation or available to Americans - so how does it hurt them? Or will all that money evenutally come back in due to future trading and do it’s evil de-valueing work down the road??
Stop thinking of prices as a number of dollars or pounds or marks, and rather as a percentage of the available buying power.
If the government cheats and simply starts running the Benjamin machine all night to create $1 trillion out of nothing, then the prices will rise to be roughly the same percentages of the new available buying power.
The really bad thing about this is that it punishes people who have savings. In Germany in the 20s, what you had was older people who were made essentially penniless, because their savings became an incredibly small percentage of the total available money, and their pensions were fixed at a number of marks a month, and that number also became a very small percentage of the available money.
A family friend visited from Brazil during their awful inflation. He said what you did was run out on payday and buy durable goods right then, because holding on to cash was equivalent to throwing part of down the sewer.
He also said that it screwed up the economy in other ways. New cars were in such short supply that people came up to him and offered him more than the new price, just standing in the street.
Money can be thought of like another commodity, and is subject to the laws of supply and demand. The more money there is lying around, the less demand there is for each unit of money.
This is exactly the arguement that I disgree with; I see money as standing outside of the system; just a chit system, not with any value in and of itself. You exchange it for goods and services.
It’s like saying I own $1 million of worth and the only way I can exchange any of it is thru this paper stuff floating around.
Why should the existance of more currency in circulation mean anything to me. All I should care about is who controls it.
EVERYTHING is essentially an auction. If an item won’t sell at $20, it will go on sale at $15, and then $10, and whatever it has to so that it will move.
More money in people’s hands means that the high prices not only stay high, but get higher, as the $20 items move instantly, and the store realizes that they would make more by charging $30, even if it takes five days to move the stock instead of one day.
Please read all the stuff people have said above. It’s really not that hard. Either you’re trying to be difficult, or there’s something in your question that we’re not addressing. Please try to find the crux of your argument with what we have said and state it clearly.