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I'm a smart lad, but I have never taken any courses in basic economics. I know that, many years ago, we guaranteed our dollar with an equal amount of gold held @ Fort Knox. At least I think this is true. For years it was pegged at #32/oz, but then it was, I believe, Nixon who canned that "antiquated" program. He knew we didn't have enough in the Fort nor could we ever have or find enough to truly back up all our intened newfound national wealth.
But now, there seems to be nothing tangible that actually backs up our currency. Except, perhaps, our GDP, our military presence, our word that "We're good for it!", and the general output of this country. You know, if we borrow some monies from some other country, say China, we'll pay it back on time, with the good old American bucko.
I don't actually understand what goes wrong if you just print up, let's say, twice as much money. Twice as much paper money. Twice as many $20s, $50s, $1s. So what. Seems to me that, within this country, it literally puts more money on the street. Over the past, say, 25 years, we've created" significantly more wealth, in held real estate, etc., than we had previously, and what did we back that up with?
Since we don't physically back our money up, then again, "so what"? Now, I understand that now we perhaps actually CAN'T always pay our debtors back, as China has learned, and they are apparently now asking for gold which we really cannot, or should not, do.
Should we return to a gold standard? I'd say no, because we'd have to dig up the entire country and placer-mine every puddle and stream to back up the amount of dollars we have floating around out there, and across the globe.
But if we don't buck up our production (go away, unions!) and re-establish our credibility, our value across the globe, our credibility, we'll be really screwed, because, as I understand it even today, we have trouble right now selling our debt notes. Or whatever they're called. And no-one wants to buy them now, and China and India are bent of gaining a stranglehold on gold globally. Fortunately, I converted all my (401)k to gold when I noted that my Fidelity and other investments were, basically, stagnant about 7 - 8 years ago. Good move for me, because I bought it at about $550/oz!
Please; can someone provide a good general theoretical discussion on how a country's basic unit of money is valued, and why printing it is NOT a good idea. Or perhaps it truly is a good idea, as in: "Who cares?"
The idea of just printing money to counter the deficit has been tried before in other countries, typically despots who just ordered more money to be printed, not understanding what really goes on.
Basically, what happens once you get off a material standard like gold, then the net worth of a currency is based off of a gut feel of a mixture of a) GDP, b) political stability, c) ability to pay off debts, d) diversity of the portfolio, etc.
So you're right, there's nothing backing up our currency. And you shouldn't use greenback as that was a "debt-free" unit of currency at one point which was abolished once large banks realized they couldn't enslave the population with it. Further, our currency is debt issued by large central banks who comprise the Federal Reserve. Without debt there wouldn't be a single dollar in circulation. BTW, the gold standard being stopped was started by FDR I think, and it was nothing less than highway robbery. He could have easily devalued the money by signing a piece of paper stating each dollar was worth this much.
However, you can't print so much money you flood the system. This leads to inflation. Further, since we'd have to issue more debt to print that money, we'd have more debt to pay off, since debt = money. With inflation comes the need to raise more money to pay for services, goods, and further, it devalues the net worth of debt held by private individuals and other countries alike.
This is important because Japan, China, and the UK constitute the three largest foreign holders of our debt. If we print massive amounts of money and need huge piles of debt to cover it, then we basically say to those holders of our debt "hey, we don't care whether you're going to see a negative rate of return" ... that would **** them off, and I believe they can call us on that debt and we'd have to pay it back immediately, which would probably sink our economy.
So sure, we could do it, but it'd reduce the value of it to nothing. See what Germany did after WWI after it was forced to pay fines due to being the perceived aggressors in the war. The value of the note then was so worthless people just used it as toilet paper, wallpaper, etc. The German people were very poor as a result, and was one of the catalysts for WWII. Zimbabwe has just pegged its currency to the dollar because its own currency was spiraling out of control, and then people refused to accept those notes since the value of them would devalue to the rate of something like 1000% in a day.
Please; can someone provide a good general theoretical discussion on how a country's basic unit of money is valued, and why printing it is NOT a good idea. Or perhaps it truly is a good idea, as in: "Who cares?"
Well, I care.
You see, the money that I am saving for my retirement will become worth-less (not worthless), i.e., worth less in value if the US Federal Reserve were to double the money supply immediately. Thus, that can of Coca-Cola that cost $1.50 is now suddenly $3.00, and this fact will cascade throughout the economy.
Did the supplier raise prices? Not really; a can of Coke is still a can of Coke. What happened is that the money is worth less and it takes more of it to buy the same good or service as it did before.
So, yeah, I agree with eskercurve regarding the fact that our lenders (China, Britain, Japan) will not be happy if we devalue the US$ too rapidly, but it also hurts those of us who cannot rob the nation blind through the use of government connections. That would be most of us.
I don't actually understand what goes wrong if you just print up, let's say, twice as much money. Twice as much paper money. Twice as many $20s, $50s, $1s. So what. Seems to me that, within this country, it literally puts more money on the street.
Money is an idea.
If we print twice as much of it, it will buy half as much as it used to.
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Over the past, say, 25 years, we've created" significantly more wealth, in held real estate, etc., than we had previously, and what did we back that up with?
We created digital dollars, about $50 trillion of them, and now we're destroying them as the western consumer defaults on its debts.
As we destroy them, the dollar's value rises, and we have deflation.
Another good thing to read is Modern Money Mechanics, by the Chicago branch of the Federal Reserve. It's a good workbook which was published in the 1980s and thus the rules for reserves and how much material and "deposits" a bank needs is out of date, but it still gives an idea of what goes on when money is printed. This is significant because the Fed basically sets the monetary policy of the USA, so when they say how that policy works in a technical fashion in great detail, people should pay attention.
Remember, debt = money, but issue too much debt, and the power of all the notes in existence is watered down, including our foreign debt holders.
Further, too much inflation leads to wages not keeping up. If the corporations needs to pay more for items, they need to charge more, and so on. In our globalized economy, goods produced by foreign nations gets more expensive if our inflation rises significantly, and thus corporations need to shell out more for their goods. That is a boon for local supply as it's all dollars, but that is not a basis for expanding our industrial base as other nations would likely devalue their own currency to keep up.
The reality of it is, we need to strike a balance between printing money and backing up that debt with real value, like services, high tech, and complex industrial goods and yes, military power. If China decided to unload all their dollar backed credit, that would significantly weaken our economy ... but the beauty of it is, they need us to keep fueling their economy. The whole world does. No other nation in the world has consumers like us, and since the American consumer accounts for ~70% of growth at home, that means the US consumer is ~20% of the WHOLE WORLD'S economy. Even if they decided to try something, the USA has the world's most powerful armed forces and we got the bomb, and we have ways of shooting down enemy missiles.
Therefore it is in China's, and the world's, vested interest in keeping us credited and able to fund the debt. And since the USA is, at heart, a hegemony intent on keeping its place as the world's #1 power, but in a peaceful way since we couldn't take on the whole world, we have to strike this balance.
If we print twice as much of it, it will buy half as much as it used to.
See, this is one of those statements I see often, but truly don't quite fathom. Why will it only buy half as much? A farmer sells his milk for $1 a gallon and I get out a piece of paper that says $1 on it, and I give it to him, and go home with my milk. Next day, having printed up another $1 on my HP inkjet scanner/printer, I buy another gallon of milk. Who cares, really? He has now got $2, and I have 2 gallons of milk.
Since it's not required that it be backed up with, say, gold, there's no change other than the number of pieces of promisory paper out there. It would only become a problem, wouldn't it, if the originator of the promisory note, the US Govt., had to make good on all those pieces of paper. And how, exactly, would they even do that today? By saying "Don't worry... we're good for it!"???
Which, seems to me, they're doing right now. Hey; let's print up some $1000 bills (we could use that old denomination right about now) and send a big bundle of them over to China and get outa debt real fast. Why not?
We created digital dollars, about $50 trillion of them, and now we're destroying them as the western consumer defaults on its debts.
You mean someone with, say, $10T in US $ can't use them at face value to pay for things? Why wouldn't the seller happily take them at value? If he did take them, why couldn't he turn around and use them to buy, say, wheat, from our US Agri-Biz? Wouldn't ADM take them?
As we destroy them, the dollar's value rises, and we have deflation.
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Originally Posted by eskercurve
The reality of it is, we need to strike a balance between printing money and backing up that debt with real value, like services, high tech, and complex industrial goods and yes, military power.
This is what I thought was happening. Our military power, on the ground, is significantly reduced right now, because we're stretched out so thin that despite lasers and uber-computers in everything from a C-130 gunship to a soldier's wrist watch, we can't provide enough manpower, not enough grunts, on the ground.
Does anyone else see a mandatory enlistment coming back soon? I do.... I mean, if it amounts to maintaining our international pride, power and value of our once-mighty dollar? and it would provide "employment" for millions of otherwise unemployable kids! Great idea!
If China decided to unload all their dollar backed credit, that would significantly weaken our economy ... but the beauty of it is, they need us to keep fueling their economy. The whole world does. No other nation in the world has consumers like us, and since the American consumer accounts for ~70% of growth at home, that means the US consumer is ~20% of the WHOLE WORLD'S economy. Even if they decided to try something, the USA has the world's most powerful armed forces and we got the bomb, and we have ways of shooting down enemy missiles.
Therefore it is in China's, and the world's, vested interest in keeping us credited and able to fund the debt. And since the USA is, at heart, a hegemony intent on keeping its place as the world's #1 power, but in a peaceful way since we couldn't take on the whole world, we have to strike this balance.
One wonders if such SciFi ideas as the creation of super-viruses, genetically aimed at particular genotypes, are in the works. To, you understand, humanely "stabilize" the world through "creative" human engineering. As in, a reduction in the population of, say, China so they don't present to us any sort of current or future threat?
Well, I'm not sure I'm much closer to truly understanding what the problem is with the "just print it up, and be quick about it!" concept. Seems to me that's exactly what Obama has recently done, and my gold value has not spiked off the scale yet, which it should have.
Perhaps it's all too whimsical and hidden and poorly defined to be understandable by anyone. Certainly NOT the average mutt in the streets, who just wants to buy a new Camaro soz he can "go cruisin' for hot chicks!" And who insists that America is Number One, man!
Is it only me who sees this as one big paper tiger, on the brink of collapse? Yikes.....
See, this is one of those statements I see often, but truly don't quite fathom. Why will it only buy half as much?
A farmer sells his milk for $1 a gallon and I get out a piece of paper that says $1 on it, and I give it to him, and go home with my milk. Next day, having printed up another $1 on my HP inkjet scanner/printer, I buy another gallon of milk. Who cares, really? He has now got $2, and I have 2 gallons of milk.
I'm detailing a situation where there are DOUBLE the amount of TOTAL dollars. Trillions and trillions of new dollars.
You are detailing a situation where we added $1 to the trillions of existing dollars. Obviously, creating an extra $1 does nothing to illustrate the principles of inflation.
Say that instead of you printing $1, let's say everybody in America printed $100 and tried to go buy some milk. What would happen to the supply of milk? It would disappear. In time, what would happen to the price of milk? The farmer would raise it to whatever he could. Apply this concept to oil, or houses, anything, or potentially everything.
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Since it's not required that it be backed up with, say, gold, there's no change other than the number of pieces of promisory paper out there. It would only become a problem, wouldn't it, if the originator of the promisory note, the US Govt., had to make good on all those pieces of paper.
You say "there's no change other than the number of pieces of promisory paper out there."
That is correct. What you seem to miss, is that the total number of dollars out there is important when it comes to valuing them; this is economic scarcity, the same principle causes platinum to be more valuable than sand.
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You mean someone with, say, $10T in US $ can't use them at face value to pay for things?
No, that is not what I mean, and I don't know what you are trying to say.
To answer the OP's question, there is absolutely no relationship between the dollar and any precious metal. In addition, the dollar today is really nothing more than monopoly money in terms of what it represents. If you look at the top of the paper money in your wallet you will note that it says that it is a Federal Reserve Note. This is quite different than the Treasury Notes or Gold and Silver certificates that used to be printed as dollars.
So what exactly is a Federal Reserve Note? It is nothing more than a vitural expression of debt. First understand that it is the Federal Reserve that has the sole job of controlling the money supply. It wasn't always this way, but it has been for the most part this way since 1971. The Fed can control the dollar supply in part by the the adjusting of interest rates, and there are no limits on this except for the whims of the Federal Reserve Chairman. The Fed, BTW, does not answer to congress or any elected official. The only elected control over the Federal Reserve is via the president's appointment of the chair. After that, the Fed only answers to the banks that own it.
The US Treasury BTW prints paper dollars at the request of the Fed who pays the Treasury for their production costs, but they no longer produce Treasury Notes that are redeemable into gold or silver. That was invalidated in 1969.
I've glossed over the intricacies of this, but most people don't realize how little control the US government has over the US money supply.
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