Why not print trillions of dollars?

Factual Questions
121

I’m trying to imagine what would happen if the government printed a trillion dollars for each person and handed it out. (Of course it would be much easier to just credit everyone’s bank account with that amount).

It would effectively equalize everyone’s wealth, since the wealth of even billionaires would be dwarfed by the money everyone now has. I guess that would have consequences. Mortgages and credit card debt and so on would be paid off and everyone would be free of debt. I think that too would have consequences.

Would people go to work? Of course one can buy anything one wants, but no one is going to want to produce it or open shop and sell it. Now that does sound like quite a consequence.

122

If you want another voice on the issue, here’s economist Karl Smith, a professor at the University of North Carolina who now writes for Forbes:

Wealth is merely “stuff that’s valuable”. That value comes from rearranging the physical matter that already exists.

123

No. Since dollars are a fiat currency, a dollar would become worthless as no one would accept the fiat to be anything but zero in real purchasing power.

Economic systems would collapse in a cascade, but the wealthy would typically remain wealthy (after the economics of it all got sorted out) as they don’t have most of their holdings in dollars.

124

I understand his point but I think he’s overselling it. Take the slice of pizza I’m going to eat during next year’s Superbowl. It’ll be made out of flour from wheat that hasn’t even been planted yet. It seems pretty nebulous to claim that pizza is already in existence however and people just have to bring it together. If somebody tried to make that pizza today, they’d have to run around plucking up random atoms from all over the world and putting them together.

125

Then you should be fine with accepting the problems I mentioned about using “market value” as a proxy for “true value”. Firstly, that the good really has to be a commodity, and have a liquid market for it to be determined, and second, that it is merely a summary statistic for the personal values of the market participants, not a normative value for the commodity (like a divinely prescribed “true value” would be).

In fact anyone buying anything on the open market is effectively saying, “this is the market price, but I think it is lower than the True Value of the thing, so I’m happy to pay the market price to get it.” And conversely with anyone selling anything.

Well then let’s take converting a pig into bacon (and presumably some other meat products) as the archetypical “creating wealth” scenario. This process involves a few steps all of which involve some effort: you have to kill the pig, drain the blood, cut up the carcass, and then package up the meat. Would you agree that each of these steps creates some wealth? Each one moves the situation away from “pig” and towards “bacon”, so presumably some of the wealth increase is attributable to each step. Wealth(pig) < Wealth(dead pig) < Wealth(bled pig) < Wealth(chopped up pig) < Wealth(bacon).

Given that chain of events, why not extend it acquisition of a pig. I can’t legally slaughter a pig owned by a neighbour, so I have to first acquire the legal rights to slaughter that pig. That requires some effort with the finding and negotiation, and a pig owned by me is closer to being bacon than a pig owned by someone else. So why would it not be Wealth(pig owned by neighbour) < Wealth(pig owned by me) < Wealth(dead pig) < Wealth(bled pig) < Wealth(chopped up pig) < Wealth(bacon)?

126

But this is the nub. The two parties to the trade do NOT agree that the items being traded are of equal value. If they did there would be no point to the trade.

If two guys trade a chicken for a basket, the guy who traded the chicken for the basket thought the basket was worth more than the chicken, and the guy who traded the basket for the chicken thought the chicken was worth more than the basket.

Maybe the reason they thought that is that one guy has 100 chickens and no baskets, and one guy has 100 baskets but no chickens. But we can easily imagine that a guy with 99 chickens and a basket is better off than a guy with 100 chickens, and a guy with 99 baskets and a chicken is better off than a guy with 100 baskets. With 1 basket now the chicken farmer can gather eggs, with a chicken the basketweaver can have dinner and go on the create more baskets.

The exchange of basket for chicken made both parties better off, and therefore increased the total amount of wealth in the economy. That doesn’t mean they’d be better off if they sat there handing chickens and baskets back and forth, because what matters is the state at the end of the transactions, and the transaction costs are an economic loss that are worth paying if you end up better off with your new goods, but aren’t if you don’t.

127

Please please please don’t laugh because I’m fiscally stupid, although I totally am (just ask my bank account), but I have sort of a follow-up question.

I’ve long known the answer to the OP’s question about why printing extra money wouldn’t work – inflation and devaluing the currency. Okay. But here’s my thought experiment. The reason there would be inflation and the currency would be considered devalued is because, presumably, everyone would know about it. Is that true?

What if, hypothetically, the President and the Treasury Sec. managed to do all this secretly? Clearly this wasn’t possible prior to our reliance on digital means of moving money around, and I’m assuming even with our banking doing much with electronic dollars rather than physical ones, there are accountants to make sure everything is legit. I mean, if President Obama just walked up to one of our creditor countries and handed them a check for $2 billion, the creditor would look askance and say, “um, where did this money come from?” So there would have to be some way of doing this subtly.

But say there were some method of juggling the books that could be done by a minimum of people who were sworn to secrecy (or just flat-out had “accidents” once the job was done).

  1. If the secret were kept perfectly, uh, secret, would there still be inflation?

  2. What on earth would be required to make this happen? In real life there’s no way anything could be kept secret, that’s the trouble with conspiracies because the more people required to be involved, the greater the odds are of someone spilling the beans. Especially with governments usually leaking like sieves. So it has to involve the minimum of people.

Well, obviously President Obama and Jacob Lew can’t tiptoe down to the U.S. Mint in the middle of the night and print out billions of extra dollars by themselves, so physical money is out. I was thinking one way might be to add a hypothetical $100 to each tax return–an insignificant figure that might not be easily traced. But if that’s not feasible, could anything work?

(Hmmm, it suddenly strikes me that there must have been a caper movie or conspiracy thriller novel with this scenario. Is there? Unless the premise itself is so fantastically unworkable and stupid – see my first sentence, I totally own my ignorance – that it’s not even worth a thought experiment.)

128

The increase in wealth would be calculated by the amount made from the sale of meat minus the cost of the pig and labor. No bacon…no wealth created. All the steps in between are not little packets of wealth being created. They are the cost of doing business which, of course, has to be subtracted from the proceeds.

Labor can produce wealth since you are making something of value or getting paid by someone to perform a service. I don’t agree that each of those steps in the slaughter of a pig creates wealth just because the pig is moving closer to bacon. Each stage requires labor which an individual can sell.

But let’s take a look at the value of the pig. Let’s say that I, who has no butchering experience, gets this pig. I kill it (which increases wealth according to you), leave it on the porch and go to bed to get some rest for the butchering I’m gonna do tomorrow. Stray dogs come along and eat my pig or it rots overnight because I’m an idiot. Would you still argue that this dead pig is worth more than the live one? Why? It seems to me you are trying to place a value on intent (at every step) rather than outcome.

129

I don’t agree with this statement. Even though I may have a lot of things I consider useless trash, if I trade them I am going to try to maximize the most I can get from the trade. We all realize that our trash has value to someone else so we attempt to extract as much value out of things we are selling.

To take an extreme example let’s say I have two cars but only need one. The other one is collecting dust but it’s in good shape. The problem is I have no money and cannot afford food. At that point I value a loaf of bread more than that car but I wouldn’t trade the car for only a loaf of bread. I would try my best to trade that car for a large amount of food because I know the car has some value more than one loaf of bread to someone else.

130

Yes, suppose you have an old car rusting away in the driveway. That car might have zero value to you, or even negative value–you’d pay someone to haul it away.

Except you know that there exist people who buy used cars. So you look around and find out what people are paying for similar used cars, and you offer your car for sale for around that price, say $1000.

Somewhere in your town there exists a guy who really needs a car. His old clunker got totalled, and without a car he can’t make it to work every day. He’d be willing to spend $2000 for a car, it’s that important. But he knows there exist people who sell used cars. So he looks around to find out what people are selling used cars for, and notices your car among many similar cars for $1000.

So he comes and looks it over, hands you $1000 and drives away with the car.

Are you better off? Yes, you are better off by more than $1000, since you would have paid someone to haul it way, but luckily you found a sucker willing to pay you instead. Is the guy who bought the car better off? Yes, if he couldn’t find someone like you selling a used car for $1000 he might have had to buy a more expensive car for $2000. Now, more than $2000 and he would have looked for a bicycle, or hiked a mile to the bus stop every day. But for $1000 he will gladly pay for your car. He is better off by $1000, and you are better off by $1000, for a net gain to all players of $2000.

Of course in the real world we have no way to assess how much the car was worth to various people, all we can go by is the prices people actually pay. And since people know the prices of goods they often are psychologically resistant to labeling certain goods as much more or much less valuable than their market price.

But surely you know of plenty of goods on sale at your local Target that you wouldn’t take even if they were free. Yeah, there are things that, even though you don’t actually want them, you’d take for free because you could sell them or exchange them for shit you actually want. But some things you wouldn’t be able sell, they’d just take up space in your living room until you threw them in the trash.

131

I would assume if the seller knows that he can fetch more money for the car then he will not let it go for 50% of what he could get. You might shave a little bit off the price to move it faster but, if you know what others will pay for it, why sell it for less?

132

I’m afraid that you’re missing the point here. Countries don’t want to be paid back.

Buying government treasuries isn’t like lending a friend money. It’s not really a loan: it’s an investment. What happens if you have money? Putting it under a mattress isn’t an option. You need a place to park it, even if you know you’re going to need it tomorrow. But every place is risky. Even keeping it in a bank is risky. But letting it pile up is equally foolish. What you do is try to find the least risky place that will in addition pay you some money (interest) for allowing them to use your money. The safest place on earth for a trillion dollars is in U.S. treasury bonds. That’s why so much of the smart money goes there. (In practice, you never put every egg in one basket and so you spread your money around and embrace different amounts of risk for different lengths of time, which is how governments got burned by Greek bonds, e.g.) China has a trilion dollars with us and so does Japan and most other countries have equally sizable amounts. Who does the U.S. go to? Itself. Half our debt is “owed” to us.

Money therefore flows in and out of this system constantly. The absolute last thing any government wants is to get their money back. Then they have a problem. They have to find the second best place to stash it. That’s not as good as what they used to have. Take the U.S. out of the world money equation and the entire system collapses.

Having the safest debt in the world is a wonderful thing. We have the entire world practically begging us to take their money. This might not last forever, true. Some other country may demonstrate that they are an even safer place and become the first level depository for money. As I said earlier, no other country is remotely in that position in the foreseeable future. That would not crash our economy, although it would hurt us by making everything more expensive. Debt in and of itself is simply not our problem. An infinite amount of debt would be, because then we couldn’t do anything except pay interest. Somewhere in between 0 and infinity is where we want to be and we are currently much nearer zero. Exactly what we want.

133

Yes, there would still be inflation, as long as the new money was actually spent and not locked away in a vault somewhere.

What would happen if the Treasury Secretary got drunk one night and secretly hacked his personal bank account to give himself a trillion dollars of new fiat money?

If he never spent it and no one ever knew, nothing. Money would only change prices if it got spent.

But suppose the Secretary retires the next day, and goes on a massive spending spree buying all sorts of luxury goods and stuff, and everyone is too dumb to realize that something is fishy.

Well, what results? It means that people who sell gold-plated toilet seats and caviar and yachts and mansions notice that they’re selling a lot more gold toilets than they used to. Sales are up! Sell more! Raise prices! More money in our pockets! The price of gold toilets rises as stock gets sold. As they make more they need more gold and porcelain, so they call the gold dealer and porcelain dealer and order more, gold just got more scarce so the gold dealer raises prices.

The toilet maker and gold dealer are making more money, so they deposit it in the bank. The bank has more money so it starts lending more money. More people get loans, suddenly it’s easy to get money. Plenty of people now have extra money in their pockets, so they go to spend it, but since everyone is buying more stuff than they used to businesses are raising prices, and selling everything even at the new higher prices since people still want the stuff and now have extra money.

Businesses have to pay more for their goods, and so the people who make goods are selling more, which means they increase production and hire more workers, which means people are getting higher salaries, only it doesn’t seem to help because somehow everything is more expensive than it used to be.

So what has happened is that the new trillion dollars goes out into the economy, is used to bid for goods and services, and merely increases the price that can be charged for goods and services. The classic definition of inflation is “too much money chasing too few goods”. Prices rise in the aggregate because when prices are raised people are still willing to pay the higher prices, and they’re willing to pay the higher prices because they have more money than they used to. Or maybe they don’t have more money, but someone does, and those people keep buying stuff at the higher prices, so people who didn’t get a raise have to pay higher prices even though they have the same income as before.

But note that injecting money into the system can result in more production as people try to grab that money. This is what the government tried to do during the recession, add money to the economy to stimulate it.

134

Of course you’re going to try to sell it for what you think the market value is. In this case, the market value of cars like yours is $1000. The fact that you’d take a million dollars for the car doesn’t change the fact that all the other cars like yours are selling for about a thousand dollars, give or take. And the fact that you hate the car and would pay to have it hauled away doesn’t change that either. And the fact that the buyer would take the car for free doesn’t change that, nor does the fact that if he couldn’t find an equivalent car for $1000 he’d reluctantly pay $2000 for your car.

He won’t pay $2000 for your car, because he can go down the street and find another one for $1000. You won’t give away your car because you can go down the street and sell it to another dude for $1000.

But you don’t value your car at $1000, and he doesn’t value your car at $1000. You value it less than $1000, because you’d sell it for $0-1000, it’s just that $1000 is the most you can get. He values it more than $1000, because he’d buy it for $1000-$2000, it’s just $1000 is the least he can pay.

135

If we get to a Mad Max scenario pigs will be more valuable than gold. Gold is only valuable when you’ve reached a certain level of civilization.

136

I would have to assume that somebody at his bank would notice that their reserve account grew by $1 trillion overnight. And hilarity would ensue as they scrambled to invest the new found reserves while having no idea if they might just as quickly disappear.

And on a technical note, I don’t think anyone at the Treasury could do this. You’d need an insider at the Federal Reserve to go crazy.

137

It would be like the difference between giving somebody a glass of vodka and sneaking the vodka into some fruity sweet drink and serving it to somebody who doesn’t know it’s there. Either way they’re going to end up drunk.

Inflation is caused by the ratio of money to goods. If you put the money into the economy, it doesn’t matter how covertly you do it. Once the money’s out there, people will start using it and it will have an inflationary effect.

I’ll grant there might be some difference. It’s like a person who knows they’re drinking - they might start acting drunk before the alcohol actually has an effect in anticipation of being drunk. And if people are aware that more money is entering the economy, they might anticipate the inflation and start reacting to it before it actually hits. But behind the psychological effect there’s a genuine effect that you can’t hide.

138

To go back to the “secret inflation” idea, this sort of thing used to happen back in the days where we used gold and silver coins as money.

If, say, a country went off and conquered and looted a faraway empire, and then shipped back tons of gold and silver, what happens? Money wasn’t created at the stroke of a pen, but now we have a lot more gold and silver sloshing around. Perhaps in a remote village a soldier comes home to retire, his pockets bulging with new gold. He’s now rich. He spends his gold all over town. Except the town is just as productive as it was before. The townspeople still only produce so many casks of wine, so many smoked hams, so many yards of cloth, and so on. So all that happens is that the price of wine and ham and cloth increase as the soldier buys things. But then the wineseller and pig farmer and tailor have more money, and they start buying things, and eventually the price of all goods increases.

But this can result in a new higher equilibrium, provided that there was unused productive capacity in the town. If the vineyard was letting fields go fallow because nobody was buying enough wine, then the new demand can lead him to increase production, hire more workers, and so on. And so the new money can act as a stimulus, provided that there was a scarcity of money in the past.

And the opposite used to happen–if the economy is growing but no new gold and silver is added, then we have deflation.

But note that what is really happening in either case is not a decrease or increase in the value of all goods, but an increase or decrease in the value of gold or silver. So rather than thinking of inflation as prices for all goods rising, it is often better to think of it as a decrease in the value of a given unit of money.

139

Okay, so what’s your point? The nation has not gained any wealth and neither have the two individuals. They have traded things of like-value to obtain something they want more.

140

That reminds me of this Twilight Zone episode.