I know that our U.S. currency stopped being backed by gold in the 1970’s. After that I thought that the government decided what our money was backed by (sheep, cattle, corn, toilet paper, SOMETHING!). Nope, come to find out none of the world’s currencies are backed by anything. It comes down to: If you think money has value, and I think money has value, then it has value - that’s it.
So, if money isn’t backed by anything, why not print up 13 trillion dollars to take care of the deficit?
Take another look at your OP. Money has value because people agree it has a certain value. Right. Now ask yourself why do people agree that it has a certain value? Everything follows from the answer to that question.
In our world, money has a certain value because we understand what it takes to generate that amount and what we can receive if spend that amount. Undermine that understanding and the whole edifice falls.
BTW, your next question needs to be “why do people think that paying off the deficit would be a good thing?”
There’s a lot of misconceptions about the value of money, and every time some sophomore or latecoming Occupier finds out that US finance isn’t really based on anything, they fly off on a tear of questions or rants or calls to do something nonsensical, like print a trillion dollars in paper money or invent bitcoins.
Here… Here’s a 50-Barbarian note I just printed. Barbarians are worth exactly the same as US Dollars, I swear. Gimme 12-13 gallons of gas for it. I promise to stand behind that piece of paper when you want the value back from it. Really.
Okay… Here’s a $50 bill in US currency. It’s backed by the promise of one of the wealthiest nations on earth, with trillions in hard assets and a nearly 250-year record of upholding economic agreements. In the end, no, there’s no difference between this fancy green piece of paper and the lavender one (my 50’s are lavender) I offered before; both are just promissory notes that we can agree have value.
Yes, the world works on the basis that a real nation issuing money will stand behind it, not that the money represents something of other agreed value.
No, you and I or a bunch of libertarian radicals or a passel of anonymous mathematics geeks can’t follow the same process and create something of equivalent value. They can only create a cargo cult equivalent and hope no real airplanes land on them.
I don’t really have faith in the US dollar because the US government stands behind it. I have faith in it because everyone else does. Many years ago, before that faith developed, people probably had faith in the US dollar because it was backed by the US government, but by now it’s just become very largely a matter of self perpetuating faith.
I don’t think it would be impossible for “a passel of anonymous mathematics geeks” to come up with something that would eventually become a widely trusted currency. It’s just very unlikely because without the solidity of a major government behind a currency it is highly likely that little things will occur to cause people not to have faith in a currency, before widespread usage and faith in that currency is sufficient to survive the shock of those little things.
Note that gold also has an artificial value–in fact a value typically well above what it actually costs to even mine it.
But a collective shift could be made tomorrow that it’s not fun to own it, and its value would then be reduced to substantially less since its industrial need is vastly oversupplied at this point.
It’s true the dollar is now a fiat currency, but for an assortment of reasons, the commitment to back it is still pretty high.
I do think we are approaching a point (couple of decades, maybe?) where our borrowing costs will so diminish the commitment to back the dollar that the US will dissolve. But I am an old, geezer scaredycat who is financially very conservative. Until we get closer to falling off that cliff, the dollar is certainly more stable than gold. When we do get close, at the last moment we’ll do exactly what you suggest: print a lot of dollars so we can pay current debt in inflated dollars worth much less.
Actually, many economists, most prominently Paul Krugman, think (very roughly speaking) that that is just what they ought to do. Although they would also point out that it would actually be a very bad idea to pay off all the debt, which would lead to much worse economic problems than we have now. National debts are really not at all like personal or business debts (to the extent that, really, it is very misleading to call them by the same name), and do not have to be paid off in the same sort of way.
The downside to the government “printing” more money (actually, there is point in actually printing it, all you need to do is change numbers in electronic accounts) is that it tends to cause inflation, meaning that the value of the currency declines if you “print” too much of it. However, inflation is currently very low and other economic factors are tending to keep it low, so even “printing” quite a lot more money probably would not raise it to unacceptable levels. (A moderate amount of inflation, like a moderate amoount of government debt, is generally considered a good thing by economists.)
Let’s revisit this notion in 20 years, especially if the high spenders keep getting elected by people who apparently think we should spend first and then try to get taxes raised later.
Between Mr Bush and Mr Obama, I think we’ve passed the tipping point.
For what it’s worth, I suspect most people who buy Treasuries are, in fact, hoping to get paid in something resembling current value of a dollar.
Let us hope they do not all panic at once too soon.
Basically, a promise to remain stable and not to crap out as an organized system backing the fiat that sets a value.
$50 will get you things right now, as you know, according to a common agreement for a given transaction. It will even get you a little gold.
The “promise,” if you want to call it that, is that it will also get you approximately the same thing tomorrow, and next year. Within reason that’s taken as a tacit “promise” that it will get you something–especially from the basket of basic necessities such as food or shelter–that is reasonably the same as what $50 will get you today.
Because if you do, then people will no longer think that the money has value.
People believe that US dollars have value because they believe they can be exchanged for goods and services. Let’s say I’m the United States treasury department, and I’ve noticed that we owe 13 trillion dollars to China (that’s not accurate, but whatever, this is just an example). China expects me to give them 13 trillion dollars; or, more accurately, to give them smaller amounts over a long time period. Here are a couple of options:
I told China that I’m going to give them 13 trillion dollars, but we agreed that I’d pay China in dollars, and I (being the US government) determine what a dollar is. I can just write “13 TRILLION DOLLARSZ!!!111” on a napkin and hand it to my Chinese counterpart. He’s not going to be happy, of course, and there will be consequences. Most directly, I’m not going to be able to borrow money anymore (or at least, not at a reasonable interest rate), since countries are going to realize that I’m going to screw them over.
Less dramatically, I could inflate the currency and pay them back in dollars that are worth a bit less than they were when I borrowed the money. This is what usually happens: I get ready cash to spend on whatever I wanted the money for (generally, paying my bills, if I’m a government), and my lender gets a low-risk investment. (This was one of the problems with Greece, for example: Since they were on the euro, they couldn’t just inflate their currency to pay off their debts.)
I could also just make up 13 trillion dollars out of whole cloth. The problem is that there’s now an extra 13 trillion dollars floating out there in the economy, and prices are going to change to reflect that. If, for example, the US government gives $40,000 to every person in the country (which is about $13 trillion), then prices are going to go up accordingly. That’s fine if you had $0 in your bank account to begin with; it sucks if you had more than $40,000, and it ruins you if you have substantially more— for example, if you’re a business or a government.
(But I’m not an economist, and I hope actual economists will correct the many mistakes here.)
The “notion” that you quoted from my post is straight up fact, and economic discussion amongst the general public would be much more rational if it were recognized now, rather than in 20 years time.
There is certainly plenty of room for disagreement about how important it is to reduce government debts and deficits, and whether higher or lower government spending would be best for the current economy. However, it is simply false to say (as far too many people do) that high government debts are analogous to high household, personal or business debts, and are bad in the same ways and for the same sorts of reasons. When they are bad (which is not necessarily always), they are bad for quite different reasons.
You are entitled to your opinion that government spending should be curtailed. There are certainly some strong arguments for that (although there are strong arguments against it too), but the very commonly heard argument to the effect that government debts should be curtailed because they are equivalent to household, personal or business debts is fallacious,* and if you believe that argument, you are simply wrong.
*In part, because of the fact that governments, unlike individuals or businesses, can indeed “print” as much money as they want, when they want, and when they think it expedient. Whether or not it is wise to do so (sometimes it probably is, more often it probably is not) governments, unlike individuals or businesses always have the ability to pay off their debts in the way the OP suggests. This is an important difference (though very far from the only one) between government and personal or business debt.
It’s a common misconception that the dollar is “backed by nothing”. In fact, it’s backed by everything, with the precise weightings of the various backings determined through the free market. A gold standard means that you can exchange your dollars for gold. A silver standard means that you can exchange them for silver. With free-market money, though, you can exchange your dollars for anything you want.
Wait, this is something I could never quite understand. With the Gold Standard, you could exchange a dollar bill for a dollar’s worth of gold. But without the Gold Standard, you can still buy a dollar’s worth of gold with…a dollar.
The difference is in the flexibility. With a gold standard, one dollar is always worth the same amount of gold, no matter what, so when the value of gold fluctuates, the dollar is dragged along on a wild roller-coaster ride. Without the gold standard, though, you can keep the dollar stable just by allowing the dollar to gold exchange to fluctuate.