Dr Evil threatens to use his 1920’s style death ray to destroy the eastern sea board unless 500 billion dollars is loaded onto an cargo ship and sent to his hidden lair. The US government directs that mint to immediately begin printing all this extra cash, and makes whatever revenue raising actions it needs to to cover this (selling t-bills, cutting government, raising taxes on the poor, cutting taxes on the rich). They then send the ship out but while it is over the marianas trench, agent powers swoops in and foils Dr. Evils plan. Unfortunately in the process the entire cargo of $500,000,000,000 dollars goes to a place only visited once for 20 minutes in 1960.
Can the US government simply declare that the money never existed, and take $500 billion dollars minus the printing cost off of its deficit?
Why would the U.S. need to take any actions other than printing up the money?
Once they started doing something as idiotic as everything you suggest, however, those are real actions with real consequences. A t-bill is essentially a contract that pays money back with interest over time. Taxes have to come out of somebody’s pocket, although collecting also takes time and so would be a nonsensical way to raise ransom money. But they are real and can’t be wished away.
The money supply and the paper money in circulation have stopped being reflective of one another long ago, if indeed they ever were. Money is electronic impulses in a computer. Paper represents one of many convenient ways to represent this. The hundreds of billions in paper money that went to Iraq disappeared in ways nobody will ever account for. Yet that money adds to the global economy in some unknown way.
The whole scenario has so many problems - how do we know that all the money vanished instead of being split up or stolen by his own henchmen? - that no real world answer is very good. But it’s a good teaching tool for why the assumptions are bad.
This is really at the heart of the question I’m trying to figure out. The rest of the scenario was just window dressing to make it less dry. personal economics I understand. I have a bank account and I take out a $100 bill then the electrical impulses are taken out of my account and turned into a $100.00. If I use this to buy something the shop owner can go to his bank and turn it in and get electrical impulses representing $100 added back into his account. It I use the $100 to light a cigar than I’m down $100, which effectively disappears from the money supply. However at a macro level economics seems to work according to a whole different set of laws, to which applying personal economic intuitions will get you as far as applying Newtonian ideas to a quantum mechanical problem.
If Dr Evil had gotten away with it then it seems to me the US government would have to balance its books and own up to the increased number of dollars in the world economy. But in this case the money is sitting at the bottom of the ocean and not adding any significant amount to the economy in any way, but in this case there was no increase. So my question is can the US government say, lets just pretend that we turned those 5 billion $100 bills back into electronic bits on our deficit sheet, no harm no foul.
I suppose that one way they could do it is to declare the bundles of cash down at the bottom of the ocean an asset to help make the deficit look better. But if the scenario changes so that all the money goes up in smoke in a nuclear conflagration where there would be no asset left to declare, yet is seems to me to be not fundamentally different scenario.
The mint would just pronounce that the cash had been effectively destroyed and replace it with another $500B that the government could use to pay down whatever debt the original printing may have created.
One thing to understand is that moving electronic money into cash money is how it works for you and the shop owner, but not how it works for a government with its own currency and national bank. The government can print money either literally (as in this example) or figuratively.
This is one reason why government debts and budgets are different from personal ones - it is literally possible to “print” trillions of dollars to pay the national debt off tomorrow. The government doesn’t have to get the money from somewhere else like you or I do. Of course, doing this would have side effects and that’s why they usually don’t. Flooding the markets with trillions of dollars out of nowhere would devalue the dollar (good old supply and demand, more or less) and that has plenty of consequences.
To avoid these consequences, the government usually gets its money from somewhere else, such as taxes and bonds.
(And now, hopefully, you see that the details you included as “window dressing” are actually a crucial piece of information when analyzing what happens in that scenario).
So I understand all this, and agree that my understanding of government level finance is lacking, hence my Newtonian vs quantum comment. (This is actually the first in a series of questions about fiat currency that I want to trickle out over the next several weeks to try to get my mind around how this stuff works.) But somehow in this discussion I missed the actual answer to the question, which is that since the dollars aren’t actually entering the economy could they
basically erase the debt with no consequence
be forced to accept the loss and making up for it in the budget somehow, much in the same way they have to pay for other expenditures.
some other alternative that I am too ill informed to contemplate.
What are the crucial detail? Was it the fate of the money? Assume that for all intents and purposes that it is generally believed that at least %99.99 of the the money is lying at the bottom of the ocean bound in plastic on pallets.
If I buy a share of stock for $100 and sell it for $500, then $400 of wealth is created out of thin air. Buying $36 worth of lumber and making a chest and selling for $436 also creates $400. A lawyer sitting at a client’s side at a negotiation whispering into an ear creates seemingly nothing but still gets paid $400 an hour. Wealth can vanish just as easily, as all those people whose houses are underwater can testify.
You might (and should) argue that the money paid out has to come from somewhere. True. It comes from previous wealth creation. It’s turtles atop turtles all the way down.
Where is the government in any of this? Nowhere. Governments do not create wealth by printing money. (They most certainly do create wealth in large numbers of other ways, say though defense programs. Don’t confuse this with libertarian economic nonsense.) The stimulus effect of government programs, like the series of quantitative easing programs, emerges by freeing up wealth previously being sat upon through the purchase of bonds or other financial instruments. Moving money has a multiplier effect. The lawyer pays staff, rent, and supplies, and that money is used to buy other stuff, and so on, creating more wealth as it ripples through the economy.
Money, in all forms, keeps the score and lubricates the economy by making purchases easier for all. The government takes in money via taxes, fees, sales of government goods, and other. It spends the money via the budget. Printing extra money isn’t part of this process. (For a car, taxes are gas; money is oil. You don’t go any farther by adding extra oil.) Selling bonds is, because the seller now has money to spend but pays it back over time with interest. (Interest is another form of wealth creation out of thin air.) There are two sides to that transaction. Printing money has only one side. That’s why people find it so dangerous. However, the kind of printing money that leads to hyperinflation is not what the U.S. government does. It’s pretty much irrelevant to the economy. You can stop listening immediately to anyone who uses the word hyperinflation about the U.S.
But if the CIA hands a warlord a bundle of cash that has to be accounted for in the CIAs budget which in turn has to be accounted for in the US governments budget, which in turn has to be raised through taxes or Tbills. The question I had is was if the money is printed to be given to a person and then destroyed can the government remove the debt from its accounts or does it have to still take it at a loss.
Basically here is how I see it with made up numbers
Prior to Dr evil government debt = 13 trillion
After putting money on cargo vessel government debt = 13.5 trillion
after vessel sinks government debt = ???
If I have it wrong let me know.
Elmer indicated that the government could declare the money destroyed and get a 500 billion credit from the treasury with no other major after effects.
Other responses (aside from the ones related to Chinese food :smack:) point out that money for governments are different than it is for normal people. Which I understand, but don’t answer the question of what should replace the ??? above. Or is it that I am so out of touch that my question is nonsensical, like asking what is infinitity minus infinity+1?
Here’s my understanding. Let’s assume that the cost to produce a hundred-dollar bill is ten cents. If the US Government produces a hundred-dollar bill and it’s subsequently destroyed, the government in effect made a profit of $99.90. So there’s no loss.
The crucial detail is the bonds. Selling bonds means that money from other people (or corporations or governments) moves to the US as the bonds are purchased. There’s also a legal obligation to repay the bonds with interest over a period of time. So the bonds change the US’s balance sheet whether or not cash is printed.
The cash itself is not particularly relevant. Printing the cash does not change the US’s balance sheet. The cash would have to get spent on something to become relevant (and even then it’s only relevant to the purchaser and buyer, not the government).
I’d say that the entire transaction took place off-budget, so no change occurred at any point. It’s always $13 trillion. Why should any change occur? Who does the government owe that $500 billion to? Nobody. Does it need to be repaid? No. Does it affect anything in the future? No. Does it go on any department’s books? No. It came from thin air and returns to thin air.
I’m still trying to figure out what real-world question you’re trying to make sense of with this. It’s not analogous to anything I can put my finger on. As an accounting thought problem it might be fun to play with, but it’s pretty much irrelevant to real governments and real economies.
We can make it even simpler. Transfer the money from a computer to a computer but embed a worm that destroys it at the other end. This makes it obvious that reality is not affected.
I continue to insist that the base confusion is that people think that printing actual “money” is meaningful. It’s a leftover from the fiat money mindset. It’s upsetting that money is representational and can be created from thin air. It’s upsetting that the government doesn’t use GAAP. Heck, double-entry bookkeeping is upsetting because it defines assets and debits in ways that are counter-intuitive at times. But any alternative is boob-bookkeeping, valuable solely because it contains five consecutive pairs of double letters.
