[miraculix]

May I humbly address this esteemed audience with a banal question regarding the nature of money?

Why can't the government just print all the money to their own choosing?
Could the US not be debt free, since basically anything can be purchased with dollars?
Any country, that has an external trade surplus, could create money without incurring any debt. Within the country, the national currency is to be used in all transactions and thus the government can buy all it needs using their own money. A concurrent trade surplus ensures that there will be enough liquidity in foreign currencies to pay for the things that the country needs to import.

In the case of the US, the main export commodity would be the dollar.

So where am I wrong?

[gego]

The Weimar Republic (Germany) tried it after WWI and this is what happened to the value of their money.

July 1914…4.2 marks to the dollar
January 1919…8.9
July 1919…14.0
January 1920…64.8
July 1920…39.5
January 1921…64.9
July 1921…76.7
January 1922…1919.8
July 1922…493.2
January 1923…17,972
July 1923…353,412
August 1923…4,620,455
September 1923…98,860,000
October 1923…25,260,208,000
November 15, 1923…4,200,000,000,000…yes, trillion.

It is simply a matter of supply and demand. More money printed makes the value of all the money decreases so it buys less. It becomes a hot potato; nobody wants to hold a rapidly depreciation asset so the velocity of spending increases, adding to the rise in prices.

Essentially, if the government prints and spends money, it has the effect of a tax increase, but because it is an invisible tax, people do not really know what government is costing them. Essentially when government can create and spend new money, it is stealing purchasing power from people and businesses.

Of course, the present system of loaning money into existence has these same effects, but the effect is much slower, because of the restraining effect of repayment of the loans and payment of interest. It took about 100 years to make the US dollar worth pennies on the dollar as compared to the Weimar Republic example above.

[miraculix]

well, so I thought at first.

I do not think it is a simple supply and demand relationship.

The Weimar Republic treausery was burdened by exorbitant reparation payments, that is what innitiated the meltdown, not merely the printing of money.

As long as the government holds the monopoly of "creating" money and the government's capital outlays are actually investments in lets say infrastructure such as roads, railways, schools, hospitals and the upkeep thereof, there will be some actual value attached to that money. It becomes more tricky if the money is merely created to fill the coffers of a connected few without the concurrent creation of real, tangible assets.

Then there is the murky sphere of social services, that may or may not translate in asset creation and/or preservation.

In my view, as long as the government is limited to its primary job to protect private property and uphold social order, those payments will stay small and will not cause inflation (Meaning "inflation" represents the excess money in circulation that is not counterbalanced by some actual asset).

As far as mayor capital investments are concerned, the government should act as the bank, issuing credit to the enterprise undertaking to build a maglev train route or constructing and operating a highway, for instance. All these things are then paid for by the enduser. That way, you have a fairer, directly apportioned tax, the toll collected etc. No need for the government to tax individuals. It would simply collect interest payments from the operator.

[NEOPO]

We never needed money just paper and pencil or other means of calculation yet before we could invent that we started using shells and such and somehow got the idea that we needed shells/money.

[dogf]

In a way that is already happening.
We no longer hear about M3.
There is a camp out there that is suggesting this is how the war is being paid for.

But the easiest way I think to answer your question is, change the word dollar for gold. Or anything else.

Assume you as a government could replicate gold. Then all you would have to do is make more. But the rest of the world would no longer value gold so it would be worth nothing. Like the US dollar

[gego]

Economist say that if money is created at the same rate as the economy expands then prices remain stable because the demand from the new money is met by the increased economic production.

This is true from the point of view of pricing, but had not the new money been created and the economy expanded, then prices would have fallen.

So new money creation benefits those for whom the new money is created at the detriment of the holders of the existing money supply. A transfer of wealth occurs. This transfer of wealth is the equivalent of a tax when the government is the beneficiary of the transfer. This is dishonest because the inflation tax is hidden from the general public. It is a regressive tax that falls most heavily on those at the bottom of the economic scale who do not have the means as the wealthy to avoid the effect. It falls particularly heavily on those with fixed income, typically the elderly.

With the current system of money creation by loaning it into existence we still have a depreciation of the value of money so can you imagine what would happen if government removed even the constraint of borrowing and simply printed up what they wanted to spend. Clearly they are not easily restrained.

And for those of us, who understand the opressiveness of government, do not want to see it funded conveniently with a printing press. Restoration of freedom requires a reduction of government, not more. As was exhibited by the USSR, government is the most inefficient form of organization possible.

I think is was disingenuous of meraculix to pose this post as a "dumb question" pretending like he did not understand, when in fact as evidenced by his second post, fully understood and was clearly intent on promoting his agenda. This screwball movement to have the government take over printing of money to pay expenses has been floating around for years, promoted for one, in the populist/fascist/racist rag, The Spotlight. It appeals to those who think they can get something for nothing.

Apparently they have never read of what happened when the Continental government at the time of the American Revolution printed up their paper money, which promptly became worthless. This is why at the Constitutional Convention the idea of authorizing the federal government to issue paper money was rejected and the state where prohibited from making anything but gold and silver legal tender. (Of course, this was circumvented in 1913 by the creation of the unconstitutional Federal Reserve System to give us our present fiat system.)

[KhanCEO]

$this->bbcode_second_pass_quote('miraculix', '
')Why can't the government just print all the money to their own choosing?

[KhanCEO]

$this->bbcode_second_pass_quote('gego', '
')And for those of us, who understand the opressiveness of government, do not want to see it funded conveniently with a printing press. Restoration of freedom requires a reduction of government, not more. As was exhibited by the USSR, government is the most inefficient form of organization possible.

[miraculix]

@gego
I do not have an agenda, only some indistinct gut feeling that something about the money supply is amiss.

To be sure, I certainly disdain government and would never asked for more of it.

With great interest I took notice of KhanCEO's post and the historical quotes contained therein. There is no way for me to validate the claim that there was a wider spread level of prosperity within the colonies and that a removal of their powers to create their own money lead to economic decline. However, I think this would be a wonderful case in point for what my instincts are telling me.

See gego, I am not a trained economist just an interested observer and always felt there must be some more equitable way of doing things. Thus, dumb question, since "conventional" wisdom tells me otherwise.

As for government issuing money without restraint I think the limitinging factors are:

external trade

and the volume of money and the size of the internal economy.

If the there is a commensurate level of money in circulation that can be convert in tangible assets and/or real services there would be no inflation. Can we agree on this?

Only if there is money that can not be spend at current prices, there is some pressure for them to creep upwards. Correct?

Then there has to be money for buying things the internal economy can not provide for, and here it comes down to whether the fiat money will be accepted by the exporting trade partner. Right?

If our hypothetical country runs a trade surplus it will not have to worry about its own money. Only if a trade deficit coincides with a rejection of its fiat tender it will find itself in dire straits. What do you think?

Thus, the only thing that keeps the US afloat is the dollar's standing as the world's reserve currency.

[MrBill]

If a well run country had both a budget surplus and no unfunded future liabilities to worry about as well as ran a trade surplus, or at least had balanced trade, then there would be very little pressure on its currency to devalue.

Also, if this well managed country only printed up enough currency to match real economic growth and increases in productivity, then inflation would also be very low or even zero.

This country would then have to almost immediately set-up capital controls and trade barriers. Why? Because their good economic managment would attract inward investment and capital from countries that are not as well run. Therefore putting upward pressure on the currency, as there is a fixed supply matched to increases in productivity, but increased foreign demand, so the price must rise.

And because a stronger currency would suck in imports, and this would undermine domestic production because local manufacturers would be figthing against a stronger currency making them less competitive. Eventually, the balanced external trade situation would flip into a trade deficit. That would then upset money supply tied to productivity increases because you would have an outflow of currency to pay for imports.

So the only way to run a well managed country with a balanced budget and a trade balance with low inflation, and a stable currency as a store of long-term wealth, is to have an isolated island economy with little or no outside trade with the world. This might be the ideal, but so long as you import energy or rely on exports to the outside world for job creation you are tied into a global system.

Then it becomes very hard to hit that sweet spot exactly where the economy is stable and not inflationary or contracting. Everything else is a trade-off made by mere mortals. Some of which are well-intentioned, but with unforeseen consequences, while other policies may be blatantly in someone's own self-interest to the detriment of others.

The best managed real economies in this world just try to strike a balance between competing groups and interests. By running a balanced budget for example as a good place to start. And managing money supply in line with domestic productivity increases, while adding or subtracting liquidity to take into account trade flows. But it is a balancing act. The bigger the economy, and the more open it is, the harder it is to manage those different expectations.