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Money Money Money


Lord GVChamp

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Money is a very interesting topic in economics. Unlike most other goods, almost every developed nation runs a monopoly on money, even the “free market” ones like America and Britain. And almost no economist (besides a few renegade Austrians) think this is a bad idea. Actually, it’s almost entirely the opposite: most economists think responsible governments SHOULD control the supply of money.

The reason is actually pretty simple: deciding whether or not to print more money isn’t that hard to do. You just look out the window and see whether the economy is over-heating or under-performing. Generally speaking, it’s not even tough to figure out how MUCH money to print either. The Federal Reserve has a fancy equation called “The Taylor Rule” that tells them what the interest rate should be, and they keep printing money or taking it out until they get to that level.

We can turn the whole system over to a PC and we’d be fine 90% of the time.

Here’s the rub: when the economy goes through a major hiccup, it means that the guy in charge screwed up. Biiiigggggggggg time.

And if you’ve been paying attention to the economy lately, you’ll see that that the recovery has stalled. The US lost jobs again. And those private jobs we did gain? Not anywhere near enough. If the US added 300,000 jobs a month, it’d take FIVE YEARS for the unemployment rate to fall back to 5%.

The economy is in baddddddddddddd shape right now. If the Bush tax cuts completely expire, we will almost definitely have another recession.

So, the guy in charge of the money supply? Yeah. He screwed up. Thanks Ben Bernanke.

But we shouldn’t be too quick to blame him, because Bernanke himself knows exactly what we should be doing. The problem is that he needs to convince other people: he needs to convince the other members of the Federal Reserve Board, and he might need to convince Congress and the general public not to throw his sorry ass out. Why? Because what we should be doing sounds freaking insane.

Print. More. Money.

I bet half the world tunes out right there. The idea is preposterous. Printing money to solve our economic problems? Terrible words pop into mind. Hyperinflation. Zimbabwe. Nazis! Isn’t inflation a bad thing? Isn’t printing more money to escape an economic crisis what irresponsible governments do and counter-productive anyways?

Goddam, I’d be lying if I said I wasn’t proud that we’re smart enough to know printing money endlessly is a bad idea. Seriously, I’m going to cry. Where are the tissues?

But, if you know anything about economists, you’ll know that their favorite phrases are “on the other hand” and “it depends.” And printing more money to solve a crisis? Well, that depends on the type of crisis, too. Sometimes printing more money makes sense. The money supply has to be flexible and respond to the needs of the economy. If the supply is too low, a recession results.

Think of it this way. What if we fixed the supply of money forever right after we kicked the British out? As the nation grew, with ever more people, businesses, and trade, money would become harder to find. Trade in parts of the country might very well fall back to barter, simply because there isn’t enough money.

Such an economy would not perform very well. The country needs more cash to service the needs of a growing economy and population.

Basically, it’s supply and demand. Demand for money sure as hell isn’t fixed, so there’s no compelling reason supply should be, either, which means we have to print more money sometimes. In fact, the whole reason we have dollars in the first place is because Great Britain tried to limit the amount of currency going to the colonies. Since money was in such sort supply, Americans used Spanish dollars instead of British pounds. The name stuck after we became independent.

Much like every other good out there, demand for money doesn’t change just when the economy grows or we have more people. It changes on the basis of how much people expect they will need money. How much cash do you have in your wallet right now? I have $34, which is pretty damn high. Usually I only have about $10 on hand. Unless I’m going to Six Flags, where I might carry $50. If I’m going on vacation, I might have $200 on hand, because you never know what stupid stuff will happen. If suddenly half of America goes on vacation, I expect that the demand for money is going to shoot up for just that reason.

Recessions are often caused by wild changes in demand like this, especially this recession. Banks suddenly start thinking that their subprime mortgages are going to fail? Hold on to the cash. Businesses see that they can’t get loans anymore? Hold on to the cash. Families worried that they might lose their jobs? Hold on to the cash.

Suddenly money is flying out of the system faster than Republicans from a gay pride parade. Households find that they can’t hoard enough cash just by working, so they stop buying new stuff. Businesses suddenly don’t have enough cash, so they lay off workers. Everyone tries to stockpile money, but there just isn’t enough of it for everyone and the economy at the same time. Unemployment results, because the only way for everyone to “win” is for everyone else to fail. It’s a zero-sum game when a hoarding crisis starts.

We know what this would look like if it happened. Unemployment shoots through the roof and inflation falls to nothing. And the sudden savings means a biggggggg influx into capital markets, so interest rates fall lower and lower. In case you haven’t been following the economy, this is exactly what is happening right now.

Ben Bernanke looks at this situation, and he sees the problem. Among other things, there’s this huge demand for dollars out there, because everyone is terrified. So, he knows what he SHOULD be doing. Like he told the Japanese, he wants to jump in his helicopter, fly over New York City, and drop money out of the sky until the recession is over. But other people won’t let him.

Because they are afraid of inflation.

Won’t it CAUSE hyper-inflation? Probably not. It only creates inflation if we’re increasing the supply faster than demand. Right now, demand is so absurdly high that it’s almost impossible to meet it: that’s why we have this unemployment problem, we can’t adjust. Pumping more money into the economy won’t create hyper-inflation, but meet the demand people have, allowing the unemployment rate to go down and inflation to return to its normal level, as opposed to the falling inflation we have right now.

Over time, as fear dies down and people don’t want to hold as much money, there’s a chance that inflation could start, but the Federal Reserve has ways of draining the excess money from the economy. The chances of a hyper-inflation episode are very low.

On the other hand, the chances of prolonged economic malaise are not low. It’s a certainty. Remember, even at 300,000 jobs added per month, it’ll take 5 years for unemployment to go back to 5%. That’s 2015. And our last jobs report was a loss. At this rate, we’re looking for a return to normal unemployment, optimistically, by 2017, and possibly not until 2021. The US has undergone at least one depression before, and another advanced economy (Japan) never really recovered from one just in the 1990s.

On the other hand, the closest we’ve come to a hyper-inflation problem in the US in recent history was the 1970s, which, while not pleasant, isn’t necessarily the worst thing in the world. Double-digit inflation for a while did not ruin us.

With that on our plate…well, there’s really no reason not to do the obvious.

Print more money!

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Paper money is fake money. Pretend money.

A truly free market has it's money backed by a real asset like gold. We've been passing around worthless slips of paper, simply pretending they have value.

Printing more fake money is a dumb idea. You cannot increase real value this way, you aren't spontaneously pulling gold bars out of hammerspace every time you print another dollar. If you print more dollars, there are more dollars floating around with no net gain in total value, and people will start charging more for stuff, because they can, because people have more dollars to buy things with. If you double the number of dollars floating around and all of a sudden minimum wage is upped to 15 bucks an hour, a hamburger at McD isn't going to stay at a dollar, it's going to go up to $2.

That's what people fail to realize when they mindlessly yell to print more money, they think more is better, and they think that there is some crazy scheme to take advantage of the delay in the largest economy in the world adjusting to a new bigger number of dollars. Yeah, maybe that burger won't jump up to $2 right away, but it will in the end, and soon enough, to keep the scheme going, you keep printing more endlessly. It goes exponential and you get Zimbabwe.

Again, the root problem is fake money with no value. If you go with your premise and imagine a world where dollars are 'hard to find,' where the minimum wage is 7 cents an hour, guess what? They're worth more and you can get a burger for a penny.

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A truly free market has it's money backed by a real asset like gold. We've been passing around worthless slips of paper, simply pretending they have value.

The gold standard has an issue, that the money supply only grows with the amount of gold you dig out of the ground. The problem is that the gold dug up out of the ground nowadays is proportional a huge amount less than the growth in all the items produced in the world, leading to deflation, which is bad for several reasons, mostly cause it promotes the hoarding of money and gold, because as you keep the said money/gold it becomes worth more over time. Similar to the current crisis, this hoarding will only promote more hoarding, which reduces spending (yes the price will drop with the decrease in money, but will have a considerable lag so will reduce the actual amount of money people hold) so we'll be in the poo returning to the gold standard.

The only way you can avoid that is to use paper money, as it allows flexiblity to increase (and decrease too, to a lesser extent) the money supply.

Printing more fake money is a dumb idea. You cannot increase real value this way, you aren't spontaneously pulling gold bars out of hammerspace every time you print another dollar. If you print more dollars, there are more dollars floating around with no net gain in total value, and people will start charging more for stuff, because they can, because people have more dollars to buy things with. If you double the number of dollars floating around and all of a sudden minimum wage is upped to 15 bucks an hour, a hamburger at McD isn't going to stay at a dollar, it's going to go up to $2.

That's what people fail to realize when they mindlessly yell to print more money, they think more is better, and they think that there is some crazy scheme to take advantage of the delay in the largest economy in the world adjusting to a new bigger number of dollars. Yeah, maybe that burger won't jump up to $2 right away, but it will in the end, and soon enough, to keep the scheme going, you keep printing more endlessly. It goes exponential and you get Zimbabwe.

Eccomnics 101, money supply determines the price level if the quanity of goods, and velocity of money stays the same (MV=PQ)

The issue at the moment is that basically the velocity of money has decreased, because bankers and businesses are scared to invest. this causes deflation. The thing that needs to be done to get the eccomny moving again is to either increase the velocity of money, hard because unless you control the banks (which in Britain does begs many questions why they don't force the banks to lend) they don't want to invest in such uncertain climates, so the only other option you have left is to increase the money supply, which the banks should use to invest, this will get things moving again, as they're more willing to invest. Yes there is a big arguement as to why we should keep fuelling the banks with money, the easy solution really is to attach to such bailing outs the condition of regulations to stop this sort of mess happening again.

Again, the root problem is fake money with no value. If you go with your premise and imagine a world where dollars are 'hard to find,' where the minimum wage is 7 cents an hour, guess what? They're worth more and you can get a burger for a penny.

To go back a bit, I don't see where gold is better, aside from being used for high end technologies, it's actually pretty useless itself. It's just durable and desirable enough to be used as a substitute to cash historically without really having any inherent wealth, certainly not to the price it's currently fetching.

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@HoT: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold, etc.

@GvC: Money supply needs to increase at the same rate transactions increase, not just because demand increases. If the demand for money is increasing because people want to hoard it all, if you increase the money supply they'll just have more to horde. Unless MPC increases.

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Paper money is fake money. Pretend money.

A truly free market has it's money backed by a real asset like gold. We've been passing around worthless slips of paper, simply pretending they have value.

Printing more fake money is a dumb idea. You cannot increase real value this way, you aren't spontaneously pulling gold bars out of hammerspace every time you print another dollar. If you print more dollars, there are more dollars floating around with no net gain in total value, and people will start charging more for stuff, because they can, because people have more dollars to buy things with. If you double the number of dollars floating around and all of a sudden minimum wage is upped to 15 bucks an hour, a hamburger at McD isn't going to stay at a dollar, it's going to go up to $2.

That's what people fail to realize when they mindlessly yell to print more money, they think more is better, and they think that there is some crazy scheme to take advantage of the delay in the largest economy in the world adjusting to a new bigger number of dollars. Yeah, maybe that burger won't jump up to $2 right away, but it will in the end, and soon enough, to keep the scheme going, you keep printing more endlessly. It goes exponential and you get Zimbabwe.

Again, the root problem is fake money with no value. If you go with your premise and imagine a world where dollars are 'hard to find,' where the minimum wage is 7 cents an hour, guess what? They're worth more and you can get a burger for a penny.

You seem to be under the odd impression that gold isn't "fake" money, just because it was fake money before paper was.

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Printing more fake money is a dumb idea. You cannot increase real value this way, you aren't spontaneously pulling gold bars out of hammerspace every time you print another dollar. If you print more dollars, there are more dollars floating around with no net gain in total value, and people will start charging more for stuff, because they can, because people have more dollars to buy things with. If you double the number of dollars floating around and all of a sudden minimum wage is upped to 15 bucks an hour, a hamburger at McD isn't going to stay at a dollar, it's going to go up to $2.

That's what people fail to realize when they mindlessly yell to print more money, they think more is better, and they think that there is some crazy scheme to take advantage of the delay in the largest economy in the world adjusting to a new bigger number of dollars. Yeah, maybe that burger won't jump up to $2 right away, but it will in the end, and soon enough, to keep the scheme going, you keep printing more endlessly. It goes exponential and you get Zimbabwe.

Again, the root problem is fake money with no value. If you go with your premise and imagine a world where dollars are 'hard to find,' where the minimum wage is 7 cents an hour, guess what? They're worth more and you can get a burger for a penny.

The trick is not to print too much. Obviously if you keep printing more as soon as you need more, you'll get hyperinflation. I won't pretend to understand the fine details, because I'm not an economist :P

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"You just look out the window and see whether the economy is over-heating or under-performing."

This is like my physicist friends saying "Fusion is easy, you just jam two hydrogen nuclei together!"

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Gold has far more intrinsic value than paper money...

Gold is more useful, but if you're using it in electronics or jewelry, you're not using it as a medium of exchange. That's really the entire advantage of having money instead of a barter system. You aren't using the cash for anything (generally) except trading it for other things and vice versa. If you're valuing something as a currency, you're assigning a value that has very little to do with what the material in question can actually do and entirely on what other people believe the value to be. If people need the material for use as something other than a currency, that's going to mess with its utility as a medium of exchange because then how do you pay for that material when you need it? The primary use of gold for the vast majority of the time that it was used as currency was... use as currency, or to make pretty things that acted as symbols of wealth. That's all based on the perception of gold as a currency far more than on its material usefulness.

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