Why can't we just print money... ?

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Re: Why can't we just print money... ?

Postby Yakk » Fri Nov 14, 2008 8:20 pm UTC

So, under our current system, all money is created by fiat, just like the OP describes.

But in the current system, all of this fiat money ... is also created with fiat debt right beside it.

So every dollar out there in the economy is sought after by someone, who wants it to pay off their debts (or to convince the lender that "I can make money, so you should lend me more so I can make more").

This debt generates a demand for money. The fiat money generates a supply for money.

So here is my question -- if you just print money, where is the demand for money coming from? Only as lubricant.

And a lubricant doesn't have any value beyond the instant. And every instant you have it it decreases in value, because the government is increasing the supply without increasing the demand. This punishes people who hold onto money, which means they try to off-load it as fast as possible.

This increases the velocity of money, which effectively increases the money supply. Which is a supply-side boost to the amount of money. Which isn't matched by an increased demand. Which lowers the value faster. Which punishes people who hold money more. Which discourages people from wanting to hold money, which ...

Hence, hyperinflation.

On the other hand, if you there are people who really want money to pay off their debts, and all new money comes into existence paired with such debts, then ... the risk of hyperinflation is lower. Things can still go pear shaped -- when people start deciding that they cannot afford to pay back their debt no matter what they do (or decide it isn't worth bothering), they stop wanting money, which causes the value of money to plummet.

Now, the value of money changing rapidly causes economic shocks. Both hyperinflation and hyperdeflation cause problems.
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Re: Why can't we just print money... ?

Postby qinwamascot » Sat Nov 15, 2008 7:01 am UTC

This is essentially a better explanation of what I said before. I'll try to add a little, but I've only had one class in macroeconomics, so it may not be the most helpful.

There are essentially 3 reasons why people demand money. Without these, you'd be better off buying interest-bearing things.
i) Transactionary demand- people want money because it is by definition the easiest good to exchange for other goods or services. To use the example my macroeconomics teacher used, if he goes to a bar and tries to pay for a drink with an economics lecture, he's unlikely to get that drink.[1]
ii) Precautionary demand - people hold on to money because it can serve as a precaution against unanticipated expenses.
iii) Speculative demand - people (primarily investors) hold on to money in case of a chance to profit that would require money on hand.

All three of these (at least the first and last for obvious reasons, and the second for less obvious reasons) are inversely proportional to inflation rates. If money is becoming less valuable, I'll want it less. This leads to an increase in spending, which leads to an even greater increase in price levels, and the cycle continues and ends in hyperinflation. There becomes essentially no reason to hold money, and the market doesn't correct this kind of problem like it does with small inflation.

[1]This is the primary reason why a money-based economy is superior to a trading economy. The definition of money is somewhat integral to this as well; it's simply any good that can readily be exchanged for other goods easily (it is not synonymous with cash, which is what the fed prints).
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Re: Why can't we just print money... ?

Postby ddxxdd » Sat Nov 15, 2008 9:55 pm UTC

All of you in this thread are looking at the the wrong way. Printing money decreases the purchasing power of your income, but SO DO TAXES. So all of you are basically complaining that printing money is bad because it has the equivalent effect of taxes (even though the OP introduced the idea as an ALTERNATIVE TO TAXES).

Yakk wrote:So, under our current system, all money is created by fiat, just like the OP describes.

But in the current system, all of this fiat money ... is also created with fiat debt right beside it.

So every dollar out there in the economy is sought after by someone, who wants it to pay off their debts (or to convince the lender that "I can make money, so you should lend me more so I can make more").

This debt generates a demand for money. The fiat money generates a supply for money.

So here is my question -- if you just print money, where is the demand for money coming from? Only as lubricant.

None of this has anything to do with government revenue. And government revenue is the main topic of this thread.

Yakk wrote:And a lubricant doesn't have any value beyond the instant. And every instant you have it it decreases in value, because the government is increasing the supply without increasing the demand. This punishes people who hold onto money, which means they try to off-load it as fast as possible.

This increases the velocity of money, which effectively increases the money supply. Which is a supply-side boost to the amount of money. Which isn't matched by an increased demand. Which lowers the value faster. Which punishes people who hold money more. Which discourages people from wanting to hold money, which ...

Hence, hyperinflation.

Well, 1. If (Supply of money) * (velocity of money)=(Aggregate prices)*(Aggregate # of transactions), then greater velocity of money should result in a LOWER money supply (i.e. more spending=less saving). There's no feedback loop that results in hyperinflation.

2. If the government prints only enough money to pay police officers, firefighters, and construction workers who fix roads, whihc devaluing everyone's savings equally, then I don't see how that's any different from a flat tax.
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Re: Why can't we just print money... ?

Postby Yakk » Sat Nov 15, 2008 10:49 pm UTC

None of this has anything to do with government revenue. And government revenue is the main topic of this thread.


No, printing money is a rather central topic to this thread. And by printing money, it means "generating money without generating an equal amount of debt allocated to individuals". And by debt, I mean "something that if you don't erase with money, you lose your real assets and possessions".

In a flat tax, you are moving money from people, to the government. Where did that money come into existence? If the government creates a fiat debt, then the demand for money stays somewhat in line with the supply of money. But... this requires the government find a source of money it doesn't create out of nothing!

That is important -- when the government says "you owe taxes", it means "you owe money". The government then injects a similar amount of money into the economy. You will want to chase that money, in order to make up for the money you owe in taxes.

Well, 1. If (Supply of money) * (velocity of money)=(Aggregate prices)*(Aggregate # of transactions), then greater velocity of money should result in a LOWER money supply (i.e. more spending=less saving). There's no feedback loop that results in hyperinflation.

The "effective supply of money" is (supply)*(velocity). By making it very very bad to hold on to cash (because that is the ONLY thing you are taxing), velocity of money goes through the roof as inflation climbs.
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Re: Why can't we just print money... ?

Postby ddxxdd » Sat Nov 15, 2008 11:45 pm UTC

Yakk wrote:That is important -- when the government says "you owe taxes", it means "you owe money". The government then injects a similar amount of money into the economy. You will want to chase that money, in order to make up for the money you owe in taxes.

But in the OP's proposal, your money loses a little bit of its value. The government then injects a similar amount of value into the economy (via printed money). Wouldn't you still chase that money in order to make up for the value you lost in tax-replacing printed money?

Yakk wrote:
Well, 1. If (Supply of money) * (velocity of money)=(Aggregate prices)*(Aggregate # of transactions), then greater velocity of money should result in a LOWER money supply (i.e. more spending=less saving). There's no feedback loop that results in hyperinflation.

The "effective supply of money" is (supply)*(velocity). By making it very very bad to hold on to cash (because that is the ONLY thing you are taxing), velocity of money goes through the roof as inflation climbs.

What about the negative feedback loop? When prices rise, don't people spend less of their money instead of more? Isn't that why moderate inflation in the real world never turns into hyperinflation?
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Re: Why can't we just print money... ?

Postby Idhan » Sun Nov 16, 2008 12:29 am UTC

Okay. I think that a very small state could be financed in this manner -- say, one with a budget of maybe 2% of GDP or the like.

The monetary base (M0) -- the number that is increased on a one-for-one basis when a Dollar is printed -- is about 10% of GDP at the moment. This is a rather unusually high number, because the Federal Reserve is attempting to manage a catastrophic financial crisis. (7% might be more normal)

Now, if you were to print 2% of GDP in money every year to fund the government, then you would be increasing the monetary base by perhaps 20% or more every year. Unless the multipliers creating monetary aggregates, velocity, etc, were to change continuously (and so as to reduce, rather than increase, inflation), then that would mean 20% annual inflation.

I think that that level of inflation is economically destructive, and that this isn't a good way to run things, but it could work. 20% annual inflation sucks, but I think that an economy can still function at those levels.

On the other hand, if you were to attempt to fund our current government -- maybe 20% of GDP -- just by printing money, then you might have, on average, 200-300% inflation. I think that at that level, it doesn't work so well.

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Re: Why can't we just print money... ?

Postby ddxxdd » Sun Nov 16, 2008 12:58 am UTC

Idhan wrote:On the other hand, if you were to attempt to fund our current government -- maybe 20% of GDP -- just by printing money, then you might have, on average, 200-300% inflation. I think that at that level, it doesn't work so well.

Good point. The answer to that, I suppose, would be to create a central federal bank that could create digital dollars without printing physical dollars.
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Re: Why can't we just print money... ?

Postby qinwamascot » Sun Nov 16, 2008 1:21 am UTC

ddxxdd wrote:Well, 1. If (Supply of money) * (velocity of money)=(Aggregate prices)*(Aggregate # of transactions), then greater velocity of money should result in a LOWER money supply (i.e. more spending=less saving). There's no feedback loop that results in hyperinflation.


You're looking at the wrong equation and using the wrong definition of inflation. Use this one:

% change in supply of money + % change in velocity = %change in general price level + % change in real output

The % change in supply of money is what the proposal is to increase. Clearly, this increases % change in general price level, which is by definition inflation. I have to question your logic as to how the money supply can decrease. It logically does not make sense if we are printing more money. Thus, since the money supply won't decrease, and we know velocity will increase, general price levels will skyrocket.

ddxxdd wrote:What about the negative feedback loop? When prices rise, don't people spend less of their money instead of more? Isn't that why moderate inflation in the real world never turns into hyperinflation?


How does that make sense? If prices are continuously rising, are you going to hold onto money which is continuously losing real purchasing power? That's an irrational thing to do, which is why we get positive feedback.

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Re: Why can't we just print money... ?

Postby Idhan » Sun Nov 16, 2008 2:30 am UTC

ddxxdd wrote:
Idhan wrote:On the other hand, if you were to attempt to fund our current government -- maybe 20% of GDP -- just by printing money, then you might have, on average, 200-300% inflation. I think that at that level, it doesn't work so well.

Good point. The answer to that, I suppose, would be to create a central federal bank that could create digital dollars without printing physical dollars.


That's irrelevant, really. If it pays its salaries, contractors, pensions, etc, with these digital dollars rather than physical ones, then they still go into the economy, increase demand, etc. The only way it would make a difference is if these digital dollars somehow couldn't be spent -- but then, of course, they wouldn't be worth anything to government employees, contractors, etc, so the government couldn't operate by paying them.

Although my original post was wrong because it assumed constant output. It doesn't make a huge difference, given the crudeness of my approach, but you might subtract 2.5% from the inflation numbers I posted and such.

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Re: Why can't we just print money... ?

Postby ddxxdd » Sun Nov 16, 2008 4:34 am UTC

qinwamascot wrote:How does that make sense? If prices are continuously rising, are you going to hold onto money which is continuously losing real purchasing power? That's an irrational thing to do, which is why we get positive feedback.

Well then the real world must not make sense, since inflation is maintained at around 3%, and rarely, if ever, goes above 5%.

One possible explanation would be that, although it makes no sense to put that money underneath your couch, it makes sense to put it into a bank account or some other interest-bearing account. Perhaps their interest rates rises with inflation rates, encouraging people to save and putting the brakes on the feedback loop.


Idhan wrote:
ddxxdd wrote:
Idhan wrote:On the other hand, if you were to attempt to fund our current government -- maybe 20% of GDP -- just by printing money, then you might have, on average, 200-300% inflation. I think that at that level, it doesn't work so well.
Good point. The answer to that, I suppose, would be to create a central federal bank that could create digital dollars without printing physical dollars.

That's irrelevant, really. If it pays its salaries, contractors, pensions, etc, with these digital dollars rather than physical ones, then they still go into the economy, increase demand, etc. The only way it would make a difference is if these digital dollars somehow couldn't be spent -- but then, of course, they wouldn't be worth anything to government employees, contractors, etc, so the government couldn't operate by paying them.


I thought that the whole point you were trying to make was that, because of the fractional reserve banking system we have, the government would be injecting $10 into the economy for every $1 it printed and spent, and thus multiplying inflation ten-fold of what it originally intended.

On the other hand, if it intends to create 30% of GDP out of thin air and maintain a 10% rate of inflation- with a 0% tax rate instead of our current 30-35% tax rate- it would need to do so with digital dollars to avoid having regular dollars get deposited into banks and blow up our economy.



And keep in mind that the whole point of this thread is to show that paying for the government through sustainable inflation instead of taxes is, at the very least, an interesting intellectual exercise.
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Re: Why can't we just print money... ?

Postby Idhan » Sun Nov 16, 2008 5:05 am UTC

ddxxdd wrote:On the other hand, if it intends to create 30% of GDP out of thin air and maintain a 10% rate of inflation- with a 0% tax rate instead of our current 30-35% tax rate- it would need to do so with digital dollars to avoid having regular dollars get deposited into banks and blow up our economy.


Okay. Let's say I'm a government employee. I work in the FBI or something. I get paid in these special digital dollars. What can I do with these digital dollars? I can't deposit them in a bank, apparently, because then most of it could be lent out. Could I spend them directly -- say, paying my rent with them? Then they'll end up in the hands of a landlord who will presumably want to deposit them: same result. To avoid having the money have a multiplied effect on aggregate demand, you have to somehow quarantine it from the economy. Somehow, you prevent it from being deposited, or from being spent too quickly (you don't want its velocity to be too high). If you can find a way of quarantining these digital dollars, all you've really done is make them worthless scrip.

Look, your plan isn't completely impossible. Some government could be paid for by monetary base expansion. In fact, some government is paid for by monetary base expansion -- i.e., the Federal Reserve buying T-bills and rebating the interest minus its own operating costs to the Treasury -- but if you want to pay for much more of it, you can't just say "these will be special Dollars that don't have a big impact on aggregate demand." Well, you can, but if so, that's because it's money that isn't very useful. If you want to change the economy so that the monetary base is much larger compared to nominal GDP -- say, 150% rather than 10% -- that's going to require a radical alteration of the economy, not some simply way of sterilizing the government's newly minted money.

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Re: Why can't we just print money... ?

Postby ddxxdd » Sun Nov 16, 2008 7:15 am UTC

Belay my last argument. Here's my new one:

Nobody needs to "quarantine" these government-created dollars. Let's just assume for a minute that you, the FBI worker, put every penny you earned in the bank; which ended up being $3000 for the month. The banks can now lend out $30,000 into the economy (assuming a 10:1 reserve ratio; the banks are allowed to lend out 10 times as much money as they have in their deposits). So it would seem as if printing out 30% of GDP, would lead to 300% inflation...

but...

if inflation ended up being that high, then people would stop saving their devalued money and start spending more. If that were the case, then banks would have less deposited money; you would hypothetically deposit only about $500 out of your $3000.

To counteract that, banks would raise their interest rates (both the interest rates that they pay their depositors and the interest rates that they charge borrowers). If banks found that they needed to charge 50% interest on loans and give 25% interest to depositors, then inflation would be kept under much stronger control.

Another simple solution would be to change the reserve ratio so that banks can only give out exactly as much money as they have deposited.

In retrospect, this now seems like an absolutely absurd system given the numbers involved. However, i'm pretty sure that regardless of how much money is created and price inflation exists in the economy, real interest rates will adjust so that real savings equals real investment, and businesses will get the capital they need to satisfy customers.

[/brain exercise]

Idhan wrote:
ddxxdd wrote:On the other hand, if it intends to create 30% of GDP out of thin air and maintain a 10% rate of inflation- with a 0% tax rate instead of our current 30-35% tax rate- it would need to do so with digital dollars to avoid having regular dollars get deposited into banks and blow up our economy.


Okay. Let's say I'm a government employee. I work in the FBI or something. I get paid in these special digital dollars. What can I do with these digital dollars? I can't deposit them in a bank, apparently, because then most of it could be lent out. Could I spend them directly -- say, paying my rent with them? Then they'll end up in the hands of a landlord who will presumably want to deposit them: same result. To avoid having the money have a multiplied effect on aggregate demand, you have to somehow quarantine it from the economy. Somehow, you prevent it from being deposited, or from being spent too quickly (you don't want its velocity to be too high). If you can find a way of quarantining these digital dollars, all you've really done is make them worthless scrip.

Look, your plan isn't completely impossible. Some government could be paid for by monetary base expansion. In fact, some government is paid for by monetary base expansion -- i.e., the Federal Reserve buying T-bills and rebating the interest minus its own operating costs to the Treasury -- but if you want to pay for much more of it, you can't just say "these will be special Dollars that don't have a big impact on aggregate demand." Well, you can, but if so, that's because it's money that isn't very useful. If you want to change the economy so that the monetary base is much larger compared to nominal GDP -- say, 150% rather than 10% -- that's going to require a radical alteration of the economy, not some simply way of sterilizing the government's newly minted money.
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Re: Why can't we just print money... ?

Postby frr » Sun Nov 16, 2008 11:50 am UTC

Yeah, it is indeed a quite interesting question.

To counteract that, banks would raise their interest rates (both the interest rates that they pay their depositors and the interest rates that they charge borrowers). If banks found that they needed to charge 50% interest on loans and give 25% interest to depositors, then inflation would be kept under much stronger control.

Maybe.. by now I'd really like to see what a professor would say to this whole inflation instead of tax thing.


2. If the government prints only enough money to pay police officers, firefighters, and construction workers who fix roads, whihc devaluing everyone's savings equally, then I don't see how that's any different from a flat tax.

There is a problematic assumption here: It does affect everyones saving equally - but nobody forces you to actually have savings (in the form of money). You would just have your savings in gold or similar instead and end up not being influenced by government-induced inflation thus not paying any "tax".
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Re: Why can't we just print money... ?

Postby Yakk » Sun Nov 16, 2008 6:00 pm UTC

Here is an example of the difficulties inflation can cause.

You have three banks in countries A B and C.

A has an inflation rate of 2%, B 20% and C 200%.

In each nation, people will put money in savings if the return on investment is a real 1%. To keep things simple, the deposit will be a 1 year term deposit, and rates will be annual returns above par.

So Banks have to offer a savings account at 3.02% in A, 21.2% in B, and 203% in C (per year) -- ie, returns of 1.0202, 1.212 and 3.03 respectively.

Now the bank is forced to keep 10% of it's investment in raw cash. Let R be the bank's return, and Q be the customers return. Then:
R * 0.9 + 0.1 = Q
R = (Q-0.1)/.9
is the relationship between the risk-free (or already accounted for) bank return R and the customer return Q for it to be barely worth the banks bother to take deposits that are also free to get (ie, zero cost to get a depositor).

Plugging in, we get:
R_A = 1.03355...
R_B = 1.2355...
R_C = 3.255...
Now, let's factor out inflation -- give real returns required:
Real_A =~ 1.0132897603485838779956427015251
Real_B =~ 1.0296296296296296296296296291667
Real_C =~ 1.085185185185185185185185

This is to offer an account that returns 1% real return above inflation.

You could understand why earning a real return of 1.33% is much easier than a real return of 3.0% or 8.5%? And the bank finding it is much easier? These are risk-free investments!

The price of gold, houses, cars and chairs is not being taxed under the tax-via-inflation scheme, because the government is not doing anything to any of those -- the government is just taxing cash, the government is not taxing wealth. The price of investing money into a bank that then keeps some, and lends the others out, is being taxed. The price of having money in your pocket is taxed.

Wealth can be denominated in cash, but reducing the value of cash has little direct impact on the value of a good. It can change how the economy flows and cause value changes in real wealth, but this does not guarantee a clean transfer of value.
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Re: Why can't we just print money... ?

Postby ddxxdd » Sun Nov 16, 2008 7:31 pm UTC

Yakk, you might want to watch the video Money As Debt. Basically, you're misapplying the fact that banks need to keep 10% of their money as cash. The way it works in the real world is that when a bank gets money deposited into their vault, they're allowed to loan out 10 TIMES AS MUCH MONEY! In other words, if there is $1 million of your money deposited in a bank, that bank is allowed to sign out $10,000,000 in loans. As Idhan pointed out earlier, that means that only about 3% of the money in the economy is actual, physical, paper dollars. That also means that a little bit of printed cash will cause 10 times more inflation than the government would expect.

So let me do your math again, this time using the amount of extra printed money and the expected savings rate as a given, and trying to find the inflation rate as a result.

Country A prints 10% of all the money in circulation every year.
If that 10% were deposited in a bank, and the bank loaned out the money to everybody that they could, then the money supply would increase by 100% every year.

If depositers want a 1% real increase in the value of their money every year, the bank will have to give them a nominal interest rate of 11.1111% a year. If the bank wanted a 5% profit margin, and it lent out no more money than it possessed in deposits, then they would have to charge 15% on their loans. However, with the 10:1 reserve ratio, they only have to charge 1.5% in order to give their depositors a 10:1 reserve ratio.

So yeah... VERY small interest rate for borrowers and spenders, VERY large interest rate for lenders and savers, and the money supply increasing by 100% a year. That sounds like a recipe for disaster.

Here's a question: would it make a difference if the government financed a no-tax budget using deficit dollars instead of printed money?
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Re: Why can't we just print money... ?

Postby qinwamascot » Mon Nov 17, 2008 2:18 am UTC

ddxxdd wrote:Yakk, you might want to watch the video Money As Debt. Basically, you're misapplying the fact that banks need to keep 10% of their money as cash. The way it works in the real world is that when a bank gets money deposited into their vault, they're allowed to loan out 10 TIMES AS MUCH MONEY! In other words, if there is $1 million of your money deposited in a bank, that bank is allowed to sign out $10,000,000 in loans. As Idhan pointed out earlier, that means that only about 3% of the money in the economy is actual, physical, paper dollars. That also means that a little bit of printed cash will cause 10 times more inflation than the government would expect.


This just isn't correct. The banks are required to hold onto 10% of the money, and can lend out the rest. Which means that if $1 million gets put in a bank, they have to hold onto $100,000, and can lend out the other $900,000. Any moderate research will confirm this. They can't possibly lend out 10 times as much as they get deposited, because that implies their reserves have a value of -900% of their deposits.

edit:
Well then the real world must not make sense, since inflation is maintained at around 3%, and rarely, if ever, goes above 5%.

One possible explanation would be that, although it makes no sense to put that money underneath your couch, it makes sense to put it into a bank account or some other interest-bearing account. Perhaps their interest rates rises with inflation rates, encouraging people to save and putting the brakes on the feedback loop.


Firstly, my post was speaking about cash money. Other forms of money are irrelevant because they are backed by cash and collapse if it does.

Try reading my actual post instead of just picking out individual quotes. I enumerated 3 reasons on why money is demanded, and showed that these three reasons decrease as inflation increases. You're taking this out of context and it's fairly obvious to anyone who actually reads this. What I said was that demand for money is irrational in a high-inflation situation. 3-5% is not high at all.

Also, not making sense and economic irrationality are different concepts. At least learn what they mean before you assume you know.
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Re: Why can't we just print money... ?

Postby Yakk » Mon Nov 17, 2008 4:10 am UTC

Inflation is maintained at about 3% recently, in modern healthy economics, because people are really really strict about _just printing money_ in a number of different ways.

Look up the 70s for a second -- it is only 30-40 years ago, and it was the last time inflation got even a bit out of control.
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Re: Why can't we just print money... ?

Postby Vaniver » Mon Nov 17, 2008 4:19 am UTC

qinwamascot wrote:This just isn't correct. The banks are required to hold onto 10% of the money, and can lend out the rest. Which means that if $1 million gets put in a bank, they have to hold onto $100,000, and can lend out the other $900,000. Any moderate research will confirm this. They can't possibly lend out 10 times as much as they get deposited, because that implies their reserves have a value of -900% of their deposits.
The arguments go thus: $1m is generated. It is put into a bank by person A. The bank keeps $100k as reserves and lends out $900k to person B, who trades it to person C, who puts it in the bank. The bank keeps $90k as reserves and lends out $810k to person D. Repeat.

It doesn't work instantaneously and there are reasons to believe it doesn't work that well, but the concept of the money multiplier is an old one in economics.
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Re: Why can't we just print money... ?

Postby qinwamascot » Mon Nov 17, 2008 5:07 am UTC

I'm aware of the concept of the money multiplier. It's a pretty basic concept. But what ddxxdd said is an incorrect interpretation of it:

ddxxdd wrote:if there is $1 million of your money deposited in a bank, that bank is allowed to sign out $10,000,000 in loans


This is simply incorrect. If we were to take this interpretation, the banks could create an arbitrary amount of money through regressive loaning, which would be bad. But it's bounded because the Required Reserve Ratio is >0. ddxxdd seems to have misinterpreted the concept here.
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Re: Why can't we just print money... ?

Postby mosc » Mon Nov 17, 2008 5:11 am UTC

10% holdings? Yeah right. FDIC regulations are not a universal constant but they're pretty close and you're not going to get a money multiplier that high from any substantial bank on the face of the earth.
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Re: Why can't we just print money... ?

Postby Idhan » Mon Nov 17, 2008 5:56 am UTC

Even if you reduced the ratio of some monetary aggregates to the monetary base (i.e., made M1, M2, M3, etc, very close to equalling M0), that doesn't mean that the monetary base will get closer to annual GDP. If that small amount of money were to change hands really quickly -- and it would with high inflation -- then the high velocity of money would still mean a high GDP:monetary base ratio without any fractional reserve banking.

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Re: Why can't we just print money... ?

Postby SJ Zero » Mon Nov 24, 2008 3:57 pm UTC

Two things:

First, interest rates on loans would have to be astronomical, or the banks wouldn't make any money. Right now you've got a situation where the value of a loan's principal depreciates at an optimistic 3%(Some members of the congress would contest this number). If you started looking at 10% depreciation per year, you'd be looking at mortgage rates of 13% just to break even compared to today, and credit card rates of 40%. Current loans would turn into losing propositions(depreciation would cut into principal faster than interest would maintain it), and legislation allowing banks to refinance fixed rate mortgages at the higher rate would be required to prevent a collapse of the banking system.

Second, it's something that has been repeated many times, but it can't be stressed enough: It would be against anyone's best interests to keep their money in a rapidly depreciating currency. Even at the current inflation rate, people understand the weakness in the system and don't save their money, leading to the current situation of a negative savings ratio. If you couldn't even make it to the next payday without losing a significant amount of value in your savings, why bother saving in that currency?

I'd expect to see a huge rise in the use of Canadian dollar or Euro bank accounts so people could transfer their funds into a currency that actually holds its value. This would further devalue the US dollar compared to those currencies, which would be great for manufacturing, but terrible for trying to maintain a global financial empire. Foreigners would buy US assets for a pittance using their more powerful dollars. We saw that in my country, we're seeing that in China. A weak dollar is great for manufacturing, but terrible for maintaining control of your economy. You get a huge boost in building stuff, but foreigners own all your factories and get all the profits.

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Re: Why can't we just print money... ?

Postby drewster1829 » Sun Dec 07, 2008 8:54 am UTC

mosc wrote:The US prints almost a Trillion dollars a year now anyway. It does little more than counter deflation. If the US didn't print any money, deflation would be extreme. Printing money is required to counter deflation. You could print MORE money to CAUSE inflation but that is a different issue. Remember too that printing money COSTS money so not every dollar you print goes into the federal budget. Anyway, I'm just pointing out that 7.86% is an absurdly stupid simplification. Printing money is much more complicated and Outside inflationary and deflationary pressures are also huge factors.


Little more than counter deflation? Is this why a dollar today is worth $.04 in 1913 dollars?

The only component of the money supply which is physical currency is M0. The rest is all electronic ("on paper") as far as I understand. Last I checked, M0 in the United States is just under a trillion dollars. When someone talks about "printing money", usually they're referring to an increase in the money supply, though this is largely composed of non-physical (i.e., electronic) money. It costs practically nothing to introduce such money into circulation, as it's just an entry in a book somewhere. Which begs the question...why does the Federal Government pay interest on money created by the Fed? It costs the Fed practically nothing to "create" it, so why are we treating it as borrowed money?

Take a look at a graph of every component of the money supply, and tell me that they're just "counteracting deflation". Has deflation been increasing exponentially in the past 15 years? Is that why our government runs a deficit and then "borrows" money from the Fed? Around 40% of our public debt is owed to the Fed. Good thing they're out there to counteract deflation. And I thought the Fed's original goal was to "control inflation" (or at least that's what they told the public).

The Austrian theory of economics goes like this: the value of a currency is exactly proportional to the ratio of the supply of money (the amount of currency available) versus the total value of the goods and services which can be bought with it. In other words, with a constant money supply, there would be deflation in a growing economy, where the same amount of money is chasing more goods and services, increasing the value of each dollar.

However, we've had growing US and global GDP for decades, yet the dollar continues to lose value, and has been since 1950. According to the Austrian school, this is because the money supply is increasing faster than the value of goods and services which can be purchased with it. Who is primarily responsible for our money supply? The private bank with a government charter known as the Federal Reserve.

Doesn't anyone find it odd that we have a central bank in a supposedly free market economy? Especially since they have a monopoly on money? (It's illegal for any currency to compete with U.S. dollars in the United States...ask Liberty Dollar out of Coeur d'Alene, ID about that one). Wouldn't a true free market economy have floating interest rates determined by the market instead of a central bank, and the freedom for anyone to use whatever currency they wanted?

Oh, and since the Fed decided to quit publishing M3 figures in 2006 (right as it was accelerating into the stratosphere), no one but the Fed actually knows what the real money supply is today.
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Re: Why can't we just print money... ?

Postby Vaniver » Sun Dec 07, 2008 9:11 am UTC

drewster1829 wrote:Take a look at a graph of every component of the money supply, and tell me that they're just "counteracting deflation". Has deflation been increasing exponentially in the past 15 years?
You realize that percentage growth is exponential growth, right? The right way to gauge the increase in deflation/inflation would be to compare log plots of money supply and GDP, not look at a straight plot of money supply.
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Re: Why can't we just print money... ?

Postby frr » Sun Dec 07, 2008 11:52 am UTC

drewster1829 wrote:Doesn't anyone find it odd that we have a central bank in a supposedly free market economy? Especially since they have a monopoly on money? (It's illegal for any currency to compete with U.S. dollars in the United States...ask Liberty Dollar out of Coeur d'Alene, ID about that one). Wouldn't a true free market economy have floating interest rates determined by the market instead of a central bank, and the freedom for anyone to use whatever currency they wanted?

Without this central bank that guarantees a certain stability of the currency, your money would just be printed paper and metal chips. Plus: You can always buy stocks, certificates or a foreign currency or something and use them as money - they aren't illegal.
Also: given how good the free market worked recently, you might as well find it odd that we don't have even stronger institutions to control it.
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Re: Why can't we just print money... ?

Postby Rysto » Sun Dec 07, 2008 4:48 pm UTC

drewster1829 wrote:Wouldn't a true free market economy have floating interest rates determined by the market instead of a central bank, and the freedom for anyone to use whatever currency they wanted?

You are free to use whatever currency you like. If you want to start up a business that only accepts "Drewster Dollars" you can go right ahead. Here in Canada there's a business that gives out "Canadian Tire Money" with every purchase and accepts it as cash.

The US government claims a monopoly on the production of US dollars -- but how is that any different from Nike claiming a monopoly on the production of Nike shoes?

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Re: Why can't we just print money... ?

Postby Zamfir » Sun Dec 07, 2008 5:10 pm UTC

The US government claims a monopoly on the production of US dollars -- but how is that any different from Nike claiming a monopoly on the production of Nike shoes?


I am not sure this is true. Governments claim the monopoly on creating money, not just dollars. If you print something that is not called a dollar but does claim/attempt to be a universal paying method, I think you are in breach of the law. but I am not quite sure where the borders lie.

There is a good reason for this: when banks were less regulated ( and could print money easier than they can nowadays), financial crises like the current one were common. To some extent, the current crisis has its roots in a similar situation: some financial instruments had a lot of the same effects as printing your own money, but without the controls usually applied to that.

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Re: Why can't we just print money... ?

Postby phonon266737 » Sun Dec 07, 2008 6:23 pm UTC

ddxxdd wrote:
if there is $1 million of your money deposited in a bank, that bank is allowed to sign out $10,000,000 in loans


With a 10% reserve ratio, you may loan out 900,000 of a 1 million dollar loan. Only the federal reserve can generate money.

The "multiplier" effect comes from this 10% being drawn off and the rest being loaned out/spent, repeatedly.
so start with $100
Sum of: 100+ 90 + 81 + 73 + 65 + ... A(n-1) * 0.90

So, it does get multiplied, but finitely.

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Re: Why can't we just print money... ?

Postby Zamfir » Sun Dec 07, 2008 7:29 pm UTC

But phonon, what you describe is exactly how banks do create money.

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Re: Why can't we just print money... ?

Postby Roĝer » Sun Dec 07, 2008 9:33 pm UTC

I'm surprised that the Ronpaul hasn't been brought up here yet. He often argues that the US Federal Reserve system is a way to tax without making it look like tax (and that this is baaad). So in a sense your plan is already taking place, although not on the scale you're proposing. By the way, how do you think the government is financing the bailout program?
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Re: Why can't we just print money... ?

Postby drewster1829 » Mon Dec 08, 2008 2:53 am UTC

Zamfir wrote:There is a good reason for this: when banks were less regulated ( and could print money easier than they can nowadays), financial crises like the current one were common.


That is true, and the Panic of 1907 was allegedly the catalyst for the creation of the Federal Reserve Bank in the United States in 1913. However, as we all know, Black Monday occurred just 16 years later, and was the worst financial crisis in U.S. history (as far as I know...there were numerous bank runs and panics in the 19th century, but I don't think any of them had the magnitude or long lasting effects as the Great Depression. Correct me if I'm wrong.) Ironically, one of the factors contributing to the Great Depression is believed to be an inability or unwillingness to increase the money supply (we were still on the gold standard), which meant that paying down debt continually increased the value of the dollar, which actually increased the value of the debt as a ratio of people's income (the dollar amount of the debt stayed the same or decreased slightly, but the value of each dollar increased more).

Zamfir wrote: I am not sure this is true. Governments claim the monopoly on creating money, not just dollars. If you print something that is not called a dollar but does claim/attempt to be a universal paying method, I think you are in breach of the law. but I am not quite sure where the borders lie.


The FBI raided Liberty Dollar on November 14th, 2007. Basically, they were trying to market a gold and silver backed alternative to the U.S. dollar which was accepted at various regional businesses. They said it was a "barter system", but the warrant of the raid is for "money laundering, mail fraud, wire fraud, counterfeiting and conspiracy." I thought there was a certain statute somewhere which prohibited this, but all I can find is in Section 10 of the Constitution where states are banned from coining money. Section 8 give the Federal government the power "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;". Perhaps there is no specific statute which gives the Federal Reserve a monopoly on money...however, one only has to look at the Liberty Dollar example to see what will actually happen (kinda like Federal Income Taxes...there is no statute which requires the paying of it, and the Supreme Court ruled numerous times in the past that the 16th Amendment allowed no new powers of taxation, but the IRS will still seize your assets and/or give you a lot of trouble if you don't pay).

frr wrote: Without this central bank that guarantees a certain stability of the currency, your money would just be printed paper and metal chips. Plus: You can always buy stocks, certificates or a foreign currency or something and use them as money - they aren't illegal.
Also: given how good the free market worked recently, you might as well find it odd that we don't have even stronger institutions to control it.


Our money is just printed paper and metal chips. It's backed by the full faith of the government, not the Federal Reserve, and why does the government delegate the authority to print money (the legality of which is highly questionable...the Constitution gives the Federal Government the right to coin money, but does not give or deny permission to delegate this power) to a private bank? The reason that money has value is because by law it must be accepted as legal tender for debts, and people accept that is has value. This has nothing to do with a central bank "ensuring stability of a currency" (if we wanted stability, then why not back it with gold, as was done prior to the collapse of the Bretton Woods System? That technically wasn't a gold standard for domestic transactions, though, since private ownership of gold was illegal and you couldn't turn in a gold certificate for an equivalent amount of gold. On the other hand, that might enforce a certain amount of fiscal responsibility in the Federal Government, since to run a deficit they would actually have to find foreign and domestic investors to sell securities to instead of just selling them to the Fed).

Our money shouldn't be controlled by an "institution", it should be backed by something real. Historically, gold and silver were used for money directly. As this would become inconvenient for many transactions, companies came about which would hold the gold for an individual and issue a "receipt" for each unit of gold stored. These receipts were essentially gold backed paper money. The switcheroo occurred after the collapse of Bretton Woods, when instead of $35 representing an ounce of gold stored in Fort Knox, it then represented nothing. If the Federal Reserve is such a tight fisted institution, then why have we had such a massive increase in the money supply recently? Shouldn't they have kept inflation in check?

People speaking of "stronger institutions" to regulate our money many times suggest a global central bank. <sarcasm on> I think that's a great idea, as long as we're trodding along towards a world government. <sarcasm off> What better way to ensure that there will be no competing currency anywhere that protects against the whims of such an institution to inflate or deflate such a global currency at the will of whomever holds their leash. </sarcasm on>

Vaniver wrote:You realize that percentage growth is exponential growth, right? The right way to gauge the increase in deflation/inflation would be to compare log plots of money supply and GDP, not look at a straight plot of money supply.


True! I wish I could find such a plot....that would be very telling, indeed...it would be very interesting to compare such a plot against officially reported Consumer Price Index (CPI) numbers...
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Re: Why can't we just print money... ?

Postby fjafjan » Mon Dec 08, 2008 4:14 pm UTC

The value of gold or silver is not more real than that of the current dollar

I don't get what is so hard to grasp about that fact, and the fact that being able to control the amount of dollars that are in cirkulation is really good for situations where you need some cash injected into the system. If you demand that x oz of gold be for each dollar, then when everyone is hogging their dollars, it will require alot more gold, demand for gold goes up, so does price, and deflation occurs. Or it just becomes very expensive to inject dollars into the system. It's bad idea, the only benefit is that it allows us some simple excuse as to what the value of money should be, but does nothing to then awnser the question regarding the value of gold.
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Re: Why can't we just print money... ?

Postby Yakk » Mon Dec 08, 2008 5:26 pm UTC

drewster1829 wrote:(kinda like Federal Income Taxes...there is no statute which requires the paying of it, and the Supreme Court ruled numerous times in the past that the 16th Amendment allowed no new powers of taxation, but the IRS will still seize your assets and/or give you a lot of trouble if you don't pay).


http://en.wikipedia.org/wiki/Brushaber_ ... c_Railroad
http://en.wikipedia.org/wiki/Bowers_v._ ... -Empire_Co.
http://en.wikipedia.org/wiki/Commission ... w_Glass_Co.
"The courts have interpreted the Sixteenth Amendment as standing for the rule that the Amendment allows a direct tax on "wages, salaries, commissions, etc. without apportionment"

"Although the Sixteenth Amendment is often cited as the "source" of the Congressional power to tax incomes, at least one court has reiterated the point made in Brushaber and other cases that the Sixteenth Amendment itself did not grant the Congress the power to tax incomes (a power the Congress has had since 1789), but only removed the requirement, if any, that any income tax be apportioned among the states according to their respective populations."

Via:
http://en.wikipedia.org/wiki/Sixteenth_ ... nstitution

Look, don't quote crackpots and miss-cite Supreme Court results (or do so in a misleading manner). The US Supreme Court has never, since the 16th amendment occurred, held that the IRS is doing anything unconstitutional with regards to applying an income tax. And the crackpots who claim that income tax isn't legal are actually causing real harm, because idiots believe them.
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Re: Why can't we just print money... ?

Postby drewster1829 » Tue Dec 09, 2008 2:27 am UTC

fjafjan wrote:The value of gold or silver is not more real than that of the current dollar

I don't get what is so hard to grasp about that fact, and the fact that being able to control the amount of dollars that are in cirkulation is really good for situations where you need some cash injected into the system.


I partially disagree, because gold has inherent value for purposes other than money, and the supply cannot be varied (Edit: cannot be varied "as easily"). This actually could be an argument against the use of gold, since tying some up to be used in transactions (whether it be actual physical gold used in the transaction, or gold held away in some vault some where and transferred using paper or electronic receipts for the gold) would reduce the supply of gold for other purposes (jewelry, electronics, etc) and thus increase the prices for these other goods. The U.S. dollar, on the other hand, has no other purpose than a store of value or unit of transfer or measure of value (unless you consider the fact that you can burn paper money for heat, or melt down coins for the metal, but the majority of money in existence is not paper money and coins, but only as electronic entries in databases).

Being able to control the amount of dollars in circulation is also handy if you're a government and don't want to balance the budget, but can't find enough investors to loan you the money(Edit: or if said government doesn't want to raise taxes). Then, you just print more. The reason why I believe this is inequitable is because there is no limit to what they can print, and the majority of people do not understand how this works. It is, in effect, a "hidden tax".

What would be a better idea than either gold or the current system would be a way to reset the money supply every quarter or so, so that the CPI remained constant. Prices would not change based on the money supply, but of course would still change as supply and demand changed. There would be no inflation or deflation over the long term. This would be far more equitable, IMO, and would not penalize people on fixed incomes or with large cash savings. (There's probably a really good reason why this won't work that I haven't thought of, and I'm sure someone out there will tell me why :D )

Yakk wrote:Look, don't quote crackpots and miss-cite Supreme Court results (or do so in a misleading manner). The US Supreme Court has never, since the 16th amendment occurred, held that the IRS is doing anything unconstitutional with regards to applying an income tax. And the crackpots who claim that income tax isn't legal are actually causing real harm, because idiots believe them.


You are correct. Apparently I was one of those idiots. :oops: My apologies.

That's what I get for watching Aaron Russo's America: Freedom to Fascism.

Edit: Just for the record, I wasn't trying to cite Supreme Court results in a misleading manner. I was just misinformed. See what I get for not doing my own research?
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Re: Why can't we just print money... ?

Postby Fallible » Tue Dec 09, 2008 5:29 am UTC

Hi all,

This is my first post. I don't normally join forums, but I've been inspired by the high level of debate observed so far.

I alternately agree and disagree with many of the arguments presented so far, but I feel there's one major point that has not yet been addressed. The original posted claimed that continuous inflation would act as a progressive wealth tax. I would like to show why I believe this isn't so.

First lets assume that it will be possible to implement continuous highish (not hyperinflation, but higher than our targeted 3-5%) inflation.

As many people have pointed out people would not want to hold dollars (or whatever theoretical currency) but would try and hold gold or some other real asset. This is true, but misses the point when it comes to determining if this is a wealth tax. Wealthy people may own a lot of cash (or gold or commodities) but the value of their cash is often trivial compared to the value of their land or company ownership.

Now what will happen to the the value of land and companies in a highly inflationary environment. Land is easy, firstly it is a physical asset in short supply, so it's value will roughly track inflation itself. The rent derived from land will also roughly track inflation as rent historically tracks wages (which are inflating).

Companies (stocks and shares) are less intuitive, initially, you might be tempted to look at historical dividend returns and say that shares will be worthless as inflation will outpace dividend yield. But where do the dividends come from? Ownership of a company implies the ability to direct a group of people and equipment towards and end that other's will pay you for. If you have the ability to deliver something people want, they will give you what they have to own it. If the inflation is high, but stable, eventually companies will adapt to this.

My point is that wealth is not money, it is the ability to passively receive money. Companies and land will still deliver passive returns to their owners in any financial environment, providing that the service/product/location is still in demand.

Inflation would not tax wealth, it would tax cash. The poor have cash, the wealthy have investments generating cash.

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Re: Why can't we just print money... ?

Postby drewster1829 » Tue Dec 09, 2008 6:32 am UTC

Fallible wrote:Wealthy people may own a lot of cash (or gold or commodities) but the value of their cash is often trivial compared to the value of their land or company ownership.


Fallible wrote:My point is that wealth is not money, it is the ability to passively receive money. Companies and land will still deliver passive returns to their owners in any financial environment, providing that the service/product/location is still in demand.

Inflation would not tax wealth, it would tax cash. The poor have cash, the wealthy have investments generating cash.


Welcome, Fallible! I'm pretty new here, too.

I'm so very glad you brought this up. When I originally read through the responses, this had crossed my mind, and I meant to mention it, but somehow I got sidetracked. You are absolutely right, and this is another reason why I think it would be a bad idea to use inflation as a tax. It would essentially make it (even more so than now) a huge encouragement for working class folks to immediately spend their earnings (I know this was mentioned up higher), since saving it would result in a pile of quickly depreciating cash (unless you could somehow find a bank account that pays more than inflation).

A certain minimum of money is required to invest (depending on the type of investment, of course), and the period of time a poor worker would have to save up his money to get enough cash to make these purchases would be time that that same cash would be decreasing in value due to inflation. On the other hand, a shrewd individual may invest in short term T-bills or something in order to try to limit the amount of value lost.

Personally, I would support an across the board flat consumption tax as an alternative to federal (and state) income tax, or using inflation as a tax, since it would reduce the loopholes and inherent complexity of our "progressive" tax system (a problem of current income tax), and would be transparent (a problem of inflation as a tax, since many people don't understand how it works, and monetary value decrease may be mixed in with a real price increase of products). However, such a consumption tax would probably penalize the poor most (correct me if I'm wrong). Think of the money saved from not having to prepare (or pay someone to prepare) your taxes every year with the current system.
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Re: Why can't we just print money... ?

Postby Rysto » Wed Dec 10, 2008 2:28 am UTC

What would be a better idea than either gold or the current system would be a way to reset the money supply every quarter or so, so that the CPI remained constant.

You're arguing for inflation targeting, which is a monetary policy followed by many countries using fiat currency. New Zealand and Canada were the first.

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Re: Why can't we just print money... ?

Postby JPA » Tue Dec 23, 2008 5:52 am UTC

So... why wouldn't this work?


If the US government had a policy of high inflation ($1trillion dollar created every year for the federal budget), then most people will dump the dollar and use an alternative (more stable) currency. Failing that, a barter system would arise. This is usually what happens in countries with hyper-inflation after all economic activity freezes.

And your original post is incorrect the US government is in control of the money supply of dollars. The Federal Reserve is not a government agency run by political appointment or government employees. It is privately owned by a cartel of banks. An act of Congress could not order an audit of its books, or even its board meeting notes.

The U.S Treasury (a government agency) is only in charge of currency (3% of dollars in the world). The Federal Reserve controls the other 97%.

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Re: Why can't we just print money... ?

Postby GoC » Mon Jan 12, 2009 12:11 am UTC

Zamfir wrote:I think this is actually two questions combined:

1. Is it a good idea to rely solely on a wealth tax to finance the government?
2. If so, is inflationary policy a good way to get that wealth tax?

The answer to the first is easy: no, it isn't. It reduces any incentive to save, and it is way too progressive. Meaning that rich people will leave your country, if they can't start a revolution. So a pure wealth tax is a brilliant method to make sure your people will not get rich, or leave before they do.

This is obviously false. It would be socialy embarrassing (extremely so) to leave due to lack of money. Most people will just shave off a few corners.
The thing about money is that it's not an end in intself, it's a way of gaining status, importance and respect. Look at the UK, the millionares there could save a fortune by moving to another country but they dont. Why?
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Carnildo
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Joined: Fri Jul 18, 2008 8:43 am UTC

Re: Why can't we just print money... ?

Postby Carnildo » Mon Jan 12, 2009 12:56 am UTC

GoC wrote:
Zamfir wrote:I think this is actually two questions combined:

1. Is it a good idea to rely solely on a wealth tax to finance the government?
2. If so, is inflationary policy a good way to get that wealth tax?

The answer to the first is easy: no, it isn't. It reduces any incentive to save, and it is way too progressive. Meaning that rich people will leave your country, if they can't start a revolution. So a pure wealth tax is a brilliant method to make sure your people will not get rich, or leave before they do.

This is obviously false. It would be socialy embarrassing (extremely so) to leave due to lack of money. Most people will just shave off a few corners.
The thing about money is that it's not an end in intself, it's a way of gaining status, importance and respect. Look at the UK, the millionares there could save a fortune by moving to another country but they dont. Why?


The millionaires might not be leaving, but that doesn't stop money from crossing the border. Look up tax haven sometime.


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