As always, there might already exist a full-throttled thread explaining this, and if so - please point me to it.
And I acknowledge that if this was such an ingenious idea, then someone would have thought of it already, but when they talk about how the U.S. debt is in the billions, trillions, etc - what’s to keep the Treasury / US Mint people from working overtime over a week (or month?), dragging out a bunch of reams of paper, printing up a shitload of $100-bills, and then just carrying them down to the local DC bank, getting a handful of cashier’s checks, and start mailing them across the globe to “whatever companies we owe money to”, and being done with it?
Incredibly catastrophic inflation that would be even worse in its effect that the national debt. The US dollar would hyperinflate as people lost all confidence in it. In a week a loaf of bread would cost $20, in two weeks $2000. Anyone with savings would effectively lose it, and nobody would save money anymore. Money would not be loaned, or if it was, the interest rates would be ridiculous. The U.S. would be unable to import anything; trade outwards would be severely disrupted. There would be a massive, crushing depression. In other words, exactly what happened every other time this was tried.
That course of action was employed by Zimbabwe. It leads to what’s known colloquially as an inflation tax, because it pays government debt at the expense of the value of money citizens have.
Because money is like any other commodity and has value based upon supply and demand. So long as the demand remains high and the supply remains low, the money has value. By printing more money you are increasing the supply. That means that, unless demand can be simultaneously increased, the value of the money must fall.
So let’s suppose the US owes $US 10 billion, and it prints 10 billion one dollar notes. By the time they can “carry them down to the local DC bank”, those notes will be worth just $US 0.50 each. IOW your billion notes are are now worth only a five hundred million dollars. So you need to print another five hundred million notes to cover the original debt. But the time they can carry these new notes down to the local DC bank, they will be worth just $US 0.25 each, and so will the original notes. So now you have printed two billion individual dollar notes, but they are only worth five hundred million dollars.
And no matter how fast you print notes, the value of the notes will always fall faster. It’s like Zeno’s Paradox, except it’s not due to a flaw in the mathematics.
The reality is much more complex and the results would almost certainly be far worse. Once people realised the US was printing money, not only currency traders would abandon the US. So would major foreign goods traders, who would lose money between the time the ship left the dock and the time the money arrived. Then once it is clear the effect that the printing is having, you get you get US companies and the US public public abandoning the currency and trying to buy Euros or bullion. That causes the value to fall even further and the currency goes into freefall. The US dollars in banks and purses lose value at a catastrophic rate because everybody is trying to sell them. As a result the price of goods skyrockets. This drives down productivity and drives up unemployment, which further devalues the currency.
But even without that, just basic supply and demand between the creditors and the foreign currency traders will ensure that you can’t pay your debts by simply printing notes. You can raise money by printing currency under some circumstances, just as you an raise money by splitting stock. But it can really only work if the value is so high that it has driven a lot of the smaller players out of the market entirely. At the moment the US dollar has a very low value, so that ain’t gonna work.
But the original debt is denominated in dollars, so that investor just has to accept those 10 billion dollars no matter what they’re worth on the market. If I owe you ten chickens, it just sucks for you if the relative value of chicken goes way down.
Germany did this following WW1 to pay its crippling war debts.
As stated above, German money eventually became worthless. Life savings were wiped out. You think the stock market fiasco crushing 401K accounts was tragic? People would use money accumulated from a lifetime of work to buy a loaf of bread. It got to the point where wheelbarrows were use to cart the money to market.
Denominations of money that had never been seen before were eventually issued.
The extreme devaluation of the Reichsmark is just one of the factors that facilitated Adolf Hitler coming to power.
~VOW
Essentially that’s what’s happening, to at least some degree. But I hasten to add “to some degree.” That “some” is fairly large though.
The treasury issues bonds and notes to pay for the debt. This is sold through broker-dealers to investors. Right now I think about 30-40% of those are non-nationals or IOW foreign investors and/or sovereigns but I could wrong about that.
Auctions are always guaranteed to sell out via the broker-dealer mechanism but don’t ask me for specifics. What I can tell you is that people generally gauge demand by the bid to cover ratio - how many bids per bonds or notes offered. I think we’ve been in the very high 2’s lately, maybe 2.7-3 or so. I think that’s considered healthy.
Now comes the tricky part. In order to help stimulate the economy, the fed has been engaging in a more or less continuous program of monetary easing. IOW they have been trying to goose inflation - deliberately. I won’t try to explain why here. That means increasing the money supply.
One of the ways they try to do that is by buying . . . you guessed it, treasury instruments. However since the crisis they also buy mortgage bonds. When they do that the bonds come out of circulation and they “print” cash to go back in.
In actual fact, there is no printing going on, it’s just ledger entries on their books and the books of banks that are members of the federal reserve system, but it’s still called “printing.”
With each extra banknote you print, you lower the value of each individual banknote.
That’s because the amount that the nation is worth doesn’t change, it’s just spread out over more banknotes, meaning that each individual banknote is worth less.
And that’s why printing more money is only a solution to an economic crisis if you’re a child or retarded. Or both.
ETA: In case it isn’t obvious, banknotes are not intrinsically worth anything; they’re a representation of value, not value itself.
A statement that is equally true of eggs or motor cars or gold. Nothing is *intrinsically *worth anything. Everything is only worth what someone else is prepared to offer you for it. Everything is a representation of value, not value itself.
Does anyone actually think currency, as in printed notes is relevant here? I really hope not since it’s just a tiny fraction of the money supply. If you mean currency in some broader sense, you need to specify - M0, 1, 2, 3, MB, MZM
I disagree. Eggs, cars and to a small extent gold have real value. They can feed you, move you to where you need to go or be used to make computer parts. That is valuable. To a large extent you are right about gold because people have agreed to use it to represent value and hold value for future use. If we could manufacture gold it would quickly lose its representational value but still have its intrinsic value as a noncorrosive metal and a conductor.
OP’s question can be addressed on two levels: (1) the logistics of money creation and (2) the underlying problems of deficit and debt.
As a technical matter, Federal Reserve banknotes are irrelevant. Money is created by computer transactions either by Federal Reserve Banks or by commercial (fractional-reserve) banks; the Fed Reserve banknotes are just chits printed for the convenience of cash users. If bonds are ignored, the only “fiat money” created by the government since 1971 are coins; hence the discussion of minting a trillion-dollar platinum coin rather than borrowing. Conceptually, to print such a coin is almost the same as selling a trillion dollars worth of bonds to the F.R.B.; the advantage of the coin is that it is not subject to Congress’s debt-limit authority.
Since selling bonds to the F.R.B. is (at a certain level of abstraction) a form of “printing money” and is already in progress, OP’s suggestion can be viewed as just a way to replace one long-term inflation danger with another.
But, as usual, the best way to understand economics is to ignore the “paper trail” and look at the underlying economy. The U.S. presently imports annually about a half-trillion dollars worth of goods more than it exports. Part of the reason for this is that inadequate federal taxation means that public spending does not constrain private spending.
[QUOTE=Warren Buffett]
The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil… Right now, the rest of the world owns $3 trillion more of us than we own of them.
[/QUOTE]
The U.S. real economy is unstable in the long-term but may be brought under control if exports and taxes are increased in the medium-term. Lowering the value of the Dollar may be part of the solution, but the main counter-currency, the Euro, also has problems. To precipitate instability in the value of the Dollar, as OP suggests to do, would just cause the “house of cards” to collapse sooner.
As you all know, my hugs are dreamy and to-die for. They’re worth a lot.
I’ve gotten into the habit of printing “I O U 1 Hug Notes” to pay for things, like my diamond tiara and my diamond studded baseball bat. They’re worth a lot.
People trade my IOU1HNs for other services hoping to cash in on getting one of my heart-melting hugs.
Lately, I’ve gone quite mad. I think it’s diamond poisoning. I just issued four billion IOU1HNs to buy a diamond island.
Problem is, people know I can’t possibly give out four billion hugs in my lifetime. Now no one wants my IOU1HNs. They’re worthless.
At least I’m still the prince of diamond island. Play ball!
That’s technically the only classical Keynesian solution other than to reverse the flow of trade - which is actually what tends to result as one currency gains supremacy over another and later the tables are turned.
I’m really not sure why poor Warren is so fretful over this. A cheap dollar is good in many ways. It sucks in many others but it makes our exports cheaper, our labor more competitive, and on and on.
