They left out the beneficial values of having a national debt.
It increases the power government has over inflation.
The U.S. Government determines what interest rate it pays for it’s debt.
If they raise the interest rate than every other bond seller has to raise their rates or people stop buying from them and buy only US Debt (never happens, they always raise their rates).
This also directly affects a lot of indexed adjustable interest rates, such as those found in mortgages.
And everyone else reacts to these new interest rates.
While it is not total power (demand has a strong effect), it is a powerfull weapon to manipulate inflation.
If the debt was smaller, then the effect of changing the deb’t interest rate would be smaller.
How so? Suppose the gov’t had a $10 defecit and was willing to borrow at 1%, but only could sell $5 worth of bonds at that rate, how would it make up the difference?
The government can decide to sell short term or long term debt. Thus they can decided to push short term rates down and let Long Term rates stay the same, or the opposite, etc.
It also can decide to sell debt to itself (see Social Security “lock box”) and is willing to pay anything that it charges itself (silly but true).
In addition I did mention that teh Government’s control is not total, it is affected by demand.
P.S. Unrelated but I wanted to mention it: Inflation has a bad rap. It is horrible to people on a fixed income, but is very beneficial to anyone with debt, (college students, parents of college students, people that own their own home, credit card holders.)
Tarkin, how do they have no competition on the selling of bonds? Banks do it, don’t they? Bad example, maybe, since banks borrow from the government. But people could also borrow from the governments of other countries, who might give better terms.
On another note, I still balk at the whole “the government makes money minting money” thing. Yes, we need to replace currency that is worn out, or coins not in circulation due to collecting or just laziness (Coinstar claims that people are hoarding $7.7 billion in pennies alone). So yeah, we need to replace those coins. But if I collect one quarter, I’ve removed that quarter from the pool, and everybody else’s quarter is worth a little bit more (supply and demand). So they argue that when they mint a new quarter, it costs them a nickle, so we all get 20 cents back.
Crap. The two transactions cancel each other back - quarter removed, quarter added. And it cost us 5 cents to make it happen, and the taxpayers pay for that.
Wrong. The government makes a quarter and buys $0.25 worth of goods (maybe a piece of gum for a senator). When the seller of the gum keeps that quarter, because it is pretty, it is out of circulation and the overall value of US money is just a little bit higher.
US currency is not backed by anything, just faith in the US government not to print too much of it. If they can print it to buy goods and then the money leaves circulation, it’s like an interest free loan to the government.
They can borrow to get money or they can print it. Normally, if they print it, it would cause inflation. If it stays out of circulation, it doesn’t exert any inflationary pressure. Free goods for the US government.
So when I go into the corporate bond market, the price I pay includes not only a risk premium above the price of treasury bonds, but also an inefficiency premium resulting from the gov’t’s monopoly in risk-free bonds?
sycorob: you are missing the point. They are not selling “bonds”. They are selling the safest bonds in the world. Definitely the safest to US citizens, and arguably the safest in the world.
For a country to not be able to pay it’s bonds requires a total failure of it’s economy. If the US economy gets that bad, then inflation would destroy the value of ANY bond a U.S. Citizen had purchased that pays in US dollars. Therefore their bonds are better, and people are willing to get less interest for them.
RitterSport: Not sure what you are saying is wrong. He might belong trying to reply to another thread.
js_africanus: Not quite. It is not an “inefficiency premium resulting from the gov’t’s monopoly in risk-free bonds”
It is a modification to the price from government’s direct intereference intended to affect interest rates. When government do this, they do NOT care if they “lose money”, or if they “make money”.
As such, you are as likely to pay a premium resulting from the gov’ts monoply / controling inflation as you are likely to get a “on-sale” price resulting from the gov’ts monoply / controlling inflation.
It is up to you to decide whether the US government’s bonds are “cheap because they want to raise inflation more than the market thinks is reasonable” or “expensive because they want cut inflation more than the market thinks is reasonable”.
I don’t know that that is necessarily true. Even though I have a quarter hidden under the cushions on my couch, it’s still there and able to be used should I get off my ass and find it. The problem with printing money, as I see it, is that unless you actually put less money out there (gov’t. buying back bonds/refusing to issue more, recalling and destroying hard currency, etc.), you’re always going to have inflation.
At best, what you’re doing by not spending that quarter is saving it. The enemy of an American-style service/consumer based economy is savings.
If I remember correctly, Russia, once free from Communism, for a time disallowed its citizens from taking their money out of the banks where they’d stashed it for decades (not having anything to spend it on), fearing widespread and uncontrolled inflation. If we took all $7.7 billion in pennies to Coinstar, I think we’d have much the same problem (OK, maybe not just from pennies, but you get it…).
Do collector coins get added to the Mwhatever money supply?
“Crap. The two transactions cancel each other back - quarter removed, quarter added. And it cost us 5 cents to make it happen, and the taxpayers pay for that.”
that he was wrong about it costing the government (or taxpayers) a net 5 cents. My post was trying to say that if a collector effectively removes the quarter from circulation, the government is net up 20 cents.
Also, Chairman Pow, when a collector removes some currency from circulation, that is different from you losing a quarter in your couch. If you find that quarter, you spend it, but a collector may never spend the coin. Since the collector’s coins are effectively out of circulation, there is no inflationary pressure from them. However, lost coins get found and spent, so they could exert inflationary pressure.
Ok, I’m not prepared to enter into the monetary facet of this argument. I do, however, have a question. Our guest contributor Hawthorne states that “125 million people” collect these state quarters. That’s in the region of half the population of this country. Are people from Angola collecting these coins? By collecting, I mean as a hobby, with the intention of possessing all 50 in good/mint condition. I seriously doubt half of you are that arduous in your amassing of laundry-machine fodder. Clarification is required. <=
I’ve had anouther thought. Do you folks remember the “commemorative” US maps with indentations for the coins? If I remember correctly, they were sending each coin to you as it was minted, so you could put it in your little cardboard souvenir. The price was $20. So you get $12.50 worth of coins and a cheap cardboard map for a Jackson! Yar, thar be benefits ahead! But how did they get a quarter to fit in Rhode Island on the map?
(Sorry I’m so off-topic… I’m just exalted by my recent regaining of net access! I severely missed Straight Dope.)
I did some minor research into coin collecting, so perhaps this is a moot point:
As I understand, the government makes certain coins specifically for collectors (silver and gold pieces, special sets of fresh-off-the-mint coins that are encased in plastic, etc.). These coins are sold for face value (or potentially more), but as we’ve seen before, the cost to produce the coins is substantially less than the face value. These coins will be taken out of circulation permanently (excepting possibly the gold and silver pieces that paranoid types are hoarding in case of global economic meltdown or a spike in the value of gold/silver), so we won’t factor these into our discussion of potential inflationary factors.
I’m assuming that most collectors don’t wait to get their Maine quarters from shopping change, and even those non-collectors who thought it would be cool to have a complete set of state quarters wouldn’t be taking enough out of circulation to make a difference.
My point being, it seems to me that no matter how many collectors there are, there won’t be enough money taken out of circulation to help stall inflation. Besides, wouldn’t the government (or DoT) have statistics on this and press more money to account for a particular amount being taken out of circulation? Are these coins even a significant factor in the total M1 money supply?
Are there any figures to state approximately how much money is being taken out of circulation and into the hands of collectors? Aside from our state quarters example below. Even if half the country had all 50 quarters, that is: $12.50 * 125,000,000 = $1,562,500,000. Hey, that is a fairly significant number, I don’t quite have the background in economics to figure out if this is significant. I presume that most of these people don’t have all 50 quarters and even then, most will get disillusioned and eventually decide that they need to pay tolls or get a drink from the vending machine and raid their collection.
You’re touching on points I rather glossed over in my report Chairman Pow. I didn’t distinguish between currency (notes and coins in the hands of the public) and other forms of money (various types of bank deposits). It is true that currency is pretty small beer in the total supply of money, and what’s more - at least for smaller denominations like quarters - central banks tend to issue as much as people want. The reason for this is that since currency yields no return, people economise on their holdings of currency and - at least according to currently popular theories of the monetary transmission mechanism in financially developed countries - central banks control liquidity conditions through interest rates rather than the supply of money as such.
So in a country like the US I wouldn’t expect coin-issuing ever to be significantly inflationary - if more than people want for newspapers and vending machines and collecting gets issued it’ll start piling up at banks and they’ll indicate to the Mint that not so much needs to be issued next year to replace that that gets lost or damaged.
As to your other point Chairman Pow - not that other people haven’t been making worthwhile points, just that I think they’ve been attended to by others - there is the issue of sofas. This is a really nice nitpick. Partly it’s answered by the above - monetary conditions aren’t really tweaked by coin issuing. In addition, the circumstances under which a great deal more people than normal would go foraging for coins in their sofas would probably be one where inflation was the least of the policy worries. But your question remains - aren’t sofa coins just temporarily out of circulation, and shouldn’t they be counted as such? This is a bit of a stock/flow question - at any point in time, some coins are going in and some are coming out: but what’s happening to the stock of sofa coins? I’d guess the stock of coins lost in sofas is increasing over time due to [ul][li]more sofas per person[]the increased value of time (due to higher real wage rates)[]the reduction in price of non-sofa-related leisure activities (causing substitution towards the largely chair-dominated internet and away from the couch-dominated televisionthe lower real value of standard-denomination coins in the presence of gradual inflation.[/ul]Against that, I suppose higher geographic mobility would afford some greater natural opportunity for the stash to be revealed.[/li]
Finally - and more seriously - I take issue with this:
There is a difference between saving and hoarding: whilst hoards are unproductive, savings can be lent to someone who wants to invest. Although it may be true in some circumstances that saving can reduce current national income, a growing economy needs more capital and the investment has to come from somewhere. If it is not financed by domestic residents, it has to be financed by foreigners. And they naturally require a return on their investment.
To Abdul:
I have worked with a number of foreigners who not only collect the coins but even bought those silly maps with the quarter slots in them. You can debate until you are blue in the face over the number of collectors.
A more interesting question: Why do we have pennies? Many other countries did away with their lower levels of currency (see pre-Euro Italy). With the number of pennies lost every year (thus falling out of circulation), one wonders if they are worth the metal they are minted on.
Welcome to the Straight Dope Message Board, InsaneJames, glad to have you with us.
For future ref: Often, when you have questions of your own, it’s helpful to search our Archives (go to the Home Page and then to the section called “Archives”)… and you’d find what Cecil had already written on Does it make sense to keep minting pennies? and thus the answer to your question.
Don’t be such a pollyanna. The Organization of Sofa Exporting Countries and the great sofa designing families of Europe have long exerted their influence with the IMF and the World Bank to prevent the mobilization of most sofas and divans. They are effectively denied independent freedom of movement and have no real-world opportunity to actualize any geographic preferences they may have. Geesh!
One of the few things I remember about the M1 money supply components is that cash held as reserves in banks (“vault cash”) is not counted as “currency” because it is not deemed to be circulating; however, it is still part of the broader M1 calculation. Thus, there is a rationale for excluding currency/coins in collections/sofas from “currency” (the most active and liquid part of the supply), but not from the entire money supply since it retains the potential for use (assuming there would be any way to estimate amount). Currency/coin which is no longer legal tender (because a government has recalled it in favor of a new currency or because the government which issued it no longer exists to honor the currency (Confederate dollars)) would fall out of the formula. It doesn’t matter for statistical purposes because cash is dwarfed by the other types of money, but I do think it is a valid question which demonstrates curiosity and can be used to illustrate the details of the money supply.
And you are correct pennies are almost not worth it.
We keep them for two reasons: 1) Stupidity 2) Tradition.
Stupidity: People are willing to round off/down taxes/tips that are less than a full penny but are not willing to do the same for less than 5 cents. Some people think stores would get away with just taking the 1-4 cents, always rounding down instead of rounding off. Even if they did, the 4 cents would be more than worth it in time and effort
People like the penny. So they want to keep it.
Note, pennies were changed from pure copper to the copper coated things we use now because the copper used in them was approaching the value of 1 cent itself.
It should also be noted that a rational culture would scrap the paper dollar. Coins last so much longer and they WOULD become acceptable/general use if we forced people to use them instead of letting people use paper dollars. Paper dollars are much too expensive to be worthwhile - they wear out so quickly that the cost of replacing them is a real factor in how many to print.
Actually it is ALWAYS beneficial. You make a profit if the interest rate is less than than the inflation, but your total debt is still reduced significantly by the inflation amount even if the credit card rate is higher.
Example:
1: You make 100,000 a year (I wish)
2: You have debt of 100,000. at an Interest Rate is 10%
3: No inflation.
Assuming you paid 10% of your salaray forever, you would never reduce the debt.
Case with inflation.
1: You make 100,000 a year (I wish)
2: You have debt of 100,000. at an Interest Rate is 10%
3: 5% inflation.
Assuming you paid 10% of your salary forever, the first you you do not reduce your debt, but the second year inflation raises your salary to 105,000 and you reduce your debt by 500. Each year after that you continue to reduce your debt.
This is a simple example, and things get much mroe complicated (You get raises, the credit cards try to raise your rate, inflation rates changes), but you get the idea.