- Real Cost To Government To Print Money From Bank
- Why Can't Government Print Money
- Real Cost To Government To Print Money Free
- Real Cost To Government To Print Money At Home
So, my question might be more philosophical than economical, but it's wracking my brain and I can't seem to find an answer.
Central banks: The Federal Reserve can and does create money, and it can and does use that money to buy government bonds. That’s what the Fed did during the Great Recession of 2007-09, and that.
It is about currency and how our money is no longer backed by 'gold.' Money (i.e. coins and bills) in essence is the same as chips at a casino. At the end of the day, if I choose, I could cash in my chips and get something of value for them. MONEY.
Back in the day, before Jimmy Carter, it was the same way, that, at any time, I could cash in my MONEY for GOLD. (which although has no intrinsic value, is determined to HAVE value.)
So, here is my question.....and I hope I explain it well. A lot of people out there are asking 'why can't we just print more money and solve the poverty problem?' Terms like 'inflation' and the 'devaluing of the dollar' are the usual buzz answers to that question. Also, people give the example that if the government were to print more money and just give everyone $50,000, then everyone would go out and buy things, thus making THINGS more in short supply, thus driving up the price of things. (simple supply/demand economics) But this is where I'm curious. With TRUE unemployment probably somewhere around 15% in this country, if DEMAND rose, then companies would WANT to hire more people and build more processing plants to keep up with demand and raise their profits. So, the influx of cash (printed money) would seem to solve the unemployment problem.
So, here is where I'm confused.....if I apply the same idea of 'printing more money and handing it out to the public' to my casino example, then that would be like the casino giving everyone at the poker table an extra $100 in chips to play with. But here's the catch. I understand the PROBLEM with doing that at the casino, because if you give people all these extra chips, then at the end of the night, when people CASH OUT, there will not be enough money in the vault to pay for all the chips. Hence the problem.
But how does that relate to American economics since there is no 'cashing out' procedure. If the government gave everyone a bunch more money, there is no 'checks and balances' since no one, at the end of the day, goes to the cashier station and exchanges their 'chips' (money in this case) for something of value.
Exchanging your chips at the end of the day for MONEY back (which has value in our eyes) makes sense, hence why you can't give out more chips than the money you have in the vault. But it seems the American dollar is not a paper representation of the 'money in the vault' no one goes to cash in their money in America.
So I don't understand how currency works and why we can't just print more money since it really isn't representative of anything of value.
Please explain, as I cant find a good answer anywhere online.
(I hope this question wasn't convoluted.)
Thank you so much for your time
Let me try to remove some of the confusion. Imagine the only good in the economy is corn and corn costs $1 a pound, and imagine you and all others earn $100 a month. Each month you buy 100 lbs of corn exchanging $1 for 1 lb of corn; so the real value of $1 is 1 lb of corn. Now suppose the government simply prints more dollar bills and gives you (and imagine everyone else) an additional hundred dollars. If you want to eat more than 100 lbs of corn a month, now you can do so but presumably, since others like you also want to do the same, the demand for corn in the economy would go up and very likely its price as well. Now you would have to give up, say $1.50 for each lb of corn. This, roughly speaking, is inflation, and it is eroding the real value of your dollars -- you are getting less corn for every dollar than you used to.
You ask, won't firms rush to meet this extra demand caused by everyone having an extra hundred dollars? Yes, they would but they'd have to hire people to work in the farms and the higher demand for workers would likely raise their wage. Also, workers will see the inflation around them and want higher dollar wages so they can continue to buy as much corn as before. In short, wages in real terms would rise and this would erode profits and as such, farms will not hire as many workers as you'd think. So yes, there can be a short-lived stimulative effect of printing money.
Bottom line is, no government can print money to get out of a recession or downturn. The deeper reason for this is that money is really a facilitator of exchange between people, a middleman in a trade. If goods could trade with goods directly, without a middleman, we would not need money. If you print more money you simply affect the terms of trade between money and goods, nothing else. What used to cost $1 now costs $10, that's all, nothing fundamental or real has changed. It is as if someone overnight added a zero to every dollar bill; that per se, changes nothing. Just as giving every student 10 extra points on a test changes nothing fundamentally.
Our next task is to show that inflation is, in fact, a tax onmoney holdings. Then, after exploring some implications of thisfact, we will examine again the reason why some countries have highinflation rates.
We start with the fiscal budget constraint that every government faces.
1. G = T + ΔB/Δt + ΔM/Δt
where G is government expenditure, T is taxes, t is time and ΔB/Δt and ΔM/Δt are the current-period changes stocks of government bonds and money held by thepublic. This constraint says that the government must finance its expenditures by either levying taxes, selling bonds to the public (increasing the stockof bonds at the rate ΔB/Δt) or printing money (increasing the money stock at the rate ΔM/Δt). The government budget deficit, government expenditures minus taxes, must be financed by either borrowing (selling bonds) or printing money.
Suppose that the government runs a deficit and finances itby printing money. For the sake of argument, we assume that thedeficit is $1 billion and that the money supply is initially $10billion. The government prints $1 billion of new money, giving itto the public in return for $1 billion worth of real goods andservices. The public sells these goods and services to the government at market prices and receives an equivalent amount of moneyreturn---the goods and services are part of G, which exceeds T by 1 billion dollars.
But the nominal money supply is now ten percent ($1 billion/$10 billion) higher and, given the public's unchanged desiredholdings of real money balances, the price level will eventuallyrise by 10 percent. As a result, the public ends up with 10percent larger nominal money holdings, which it gave up real goodsand services to obtain, but faces a 10 percent higher price level.Since its real money holdings have not changed, it has receivednothing for the goods and services it gave to the government. The public is no better off than it would have been if thegovernment increased taxes by $1 billion dollars and used thosefunds to purchase the goods and services from it.
By printing money instead of raising income or sales taxes,the government is taxing money holdings instead of income orsales. Since the price level rises by 10 percent, everyone loses10 percent of their initial money holdings and has to give up anequivalent amount of their current income to acquire sufficientadditional nominal money holdings to maintain their real moneyholdings at the desired level. Had income taxes been increasedinstead, the government would have taken $1 billion (the sameamount) directly off their current year's earnings.
Of course, even non-inflationary growth of the money supplythat satisfies the public's desire to hold additional real moneybalances as real income grows provides revenue to the government,which simply prints the money and uses it to purchase goods andservices. This revenue from money creation is called seigniorage.
An important feature of the inflation tax is that people aretaxed in proportion to the amount of money they hold. A personwho holds $100,000 cash in the bank will be taxed by $10,000, touse the above example, where as a person who holds only $100 cashin the bank will be taxed just $10 dollars. Confronted with thegreater inflation rate, both these individuals are going to tryto get by with smaller money holdings. They will hold less moneyfor the same reason that they would try to use less gasoline ifthe government had taxed it. This tendency to hold less real money holdings when the rate of inflation rises results from the fact that the cost of holding money is equal to the nominal interest rate, which contains an allowance for inflation. Consider again the Fisher equation
2. i = r + τ
where i is the nominal interest rate, r is the real interest rate and τ is the expected rate of inflation. As τ rises, so does i for any given r . We saw in the previous Topic that people hold less money when the cost of holding it increases.
Real Cost To Government To Print Money From Bank
This prompts us to model the demand for money in a differentbut, of course, equivalent way than we did in the previous Topic.We can put the real money stock on the horizontal axis instead ofthe nominal money stock, and the cost of holding money on thevertical axis, as shown in Figure 1. The demand curve for moneyon this graph, called DMDM, is downward sloping because people hold more money when the cost of holding it falls. A measure of the benefit from holding an additional unit of money is given by the vertical distance between the demand curve and the horizontal axis at the quantity of real money balances initially held.
Let us compare this demand curve for real money balanceswith the demand curve for nominal money balances developed inthe previous Topic, shown here in Figure 2. The price on thevertical axis in Figure 1 is the price of a unit of real moneyholdings in terms of the interest sacrificed by not investing inreal capital or bonds, whereas price on the vertical axis inFigure 2 is the amount of real output that has to be given up toget one unit of nominal money.
Suppose that, starting with a zero rate of actual and expectedinflation, the government begins increasing the money supply at a10 percent faster rate than previously. The expected inflation ratewill soon rise to 10 percent. At that point, the nominal interestrate will have risen 10 percentage points above the real interestrate to i1 in Figure 3. Previously, when there was no inflation, it equaled the real interest rate r0. The public reduces its real money holdings from (M/P)0 to (M/P)1. Given the nominal money stock in circulation at any point in time, there will have to be a one-shot rise in the price level to bring about the appropriately lower real money stock. The inflation tax on real money holdings is the designated rectangle in Figure 3.
We can now see that the decision of the government to financea deficit by printing money will have two effects on the pricelevel. First, by increasing the rate of inflation it will increasethe rate at which the price level is increasing. Second, once thepublic realizes that the inflation rate has increased there will bea once-and-for all jump in the price level to reduce real moneyholdings to the new lower desired level. These two effects areshown in Figure 4.
Nominal money holdings and the price level are on the vertical axis andtime is on the horizontal one. The line MM shows thetime path of the nominal money stock and the line PP representsalternative time paths of the price level. If the public realizesimmediately that the government has decided to finance its budget deficitby printing money, the price level will jump up immediately from point a to point b and continue to increase bya constant amount per period thereafter. If it takes people some time torealize what is happening, the jump will be spread over an interval of timeas shown by the line running from point a topoint c .
As can be seen from the government's budget constraint presented in Equation 1,it can run a budget deficit without printing money by simply borrowing from the public the money it spends in excess of its tax revenues. This would seem to be a preferable way of financing the deficit because it does not increase the rate of inflation.
Inflation, even when it is fully expected, is bad for severalreasons. First, it causes people to hold less money and therebyuse up time and effort running back and forth to the bank andtransferring funds between interest earning assets and chequingaccounts. This cost is shown by the area under the demand curve forreal money holdings between (M / P)1 and (M / P)0 in Figure 5. As eachunit of real money balances is added the benefit from adding that unit is theamount people are willing to pay to have it, which is the vertical distancebetween the demand curve and the horizontal axis multiplied by one. The additional money costs nothing both because fiat money can be created by the government at virtually zero real resource cost and it costs nothing to haveone initial equilibrium price level rather than another. Accordingly, thesocial gain from holding any particular quantity of real money balances isthe area under the demand curve for real money balances to the left of thequantity held. At a minimum, therefore, the welfare cost of the inflationtax is the area under the demand curve between the pre-tax and post-taxequilibrium quantities of real money balances. By having a lower inflationrate the government can induce the public to hold more money and save the shoeleather costs of running back and forth to the bank and the busywork costs involved in transferring funds into and out ofchequing accounts.
An additional cost of inflation is that firms and workers have tobe constantly raising prices, printing new catalogues and changingsigns. These are called menu costs. And a further cost is the resources that the government has to use up constantly adjusting nominal taxrates, pensions, welfare benefits, and so forth, to keep the realimpact of its actions on the economy the same. These adjustmentsdo not come without political wrangling and other costs. Morecosts arise when inflation is unexpected and highly variable---it isalmost always the case that countries with high inflation also havelarge variations in their inflation rates. The result is continualwealth redistributions back and forth between debtors and creditors.
Why Can't Government Print Money
If inflation is so bad, and we know how to avoid it, why dosome countries have it? It turns out that the underlying cause ofhigh inflation is political. A country, faced with high inflationcan do one of three things. First, it can borrow from the publicinstead of printing money. To do this, governments of countrieswith high inflation have to pay very high interest rates---they mustcompensate borrowers for the expected loss in real value of thepublic debt due to the prospect of future inflation. Unless it canconvince the public that it is going to control inflation, the government will face prohibitive borrowing costs. A second thing thegovernment can do is raise taxes to eliminate the deficit. To dothis it must have the political support to be able to force peopleto pay the more taxes. Since every segment of the community wantssome other segment to pay the taxes, the government may not be ableto raise taxes and keep itself in power. Finally, of course, the government can eliminate its budget deficit by reducing government expenditures. This usually means that it will have to employ less people and provide less services. Government employees may have the political power to prevent widespread layoffs in the public sector, particularly if it is a largefraction of the economy, and powerful special interest groups maybe able to prevent the elimination of government subsidies. Againthe government's ability to retain power will be at risk.It is not an accident that countries experiencing very highinflation rates suffer from political instability. It is becauseof that instability that their governments cannot maintain propercontrol over their money supplies.
Real Cost To Government To Print Money Free
It is now time for a test on this Topic. Again, think up your ownanswers before looking at the ones provided.
Question 1
Question 2
Question 3
Real Cost To Government To Print Money At Home
Choose Another Topic in the Lesson
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