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cockswain's avatar

What happens when the gov't prints money?

Asked by cockswain (15259points) March 28th, 2010

How does this process work? It begs simple observations like “Why don’t we print enough money so everyone will be rich” or “it seems it would just reduce the real value of wealth”, but neither of those could be completely true. I know there are strong reasons for controlling the money supply (e.g. how Volcker beat inflation). But the Fed controlling the money supply isn’t the same as printing more money. How does this work? What are the benefits and consequences?

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15 Answers

skfinkel's avatar

Isn’t this inflation? Just like when a corporation makes more shares—whatever you have is worth less?

Lightlyseared's avatar

Physical paper money is just an abstract representation of something else.

cockswain's avatar

@skfinkel I don’t think so, or else the gov’t would never do it since inflation is a bad thing. Inflation is when price levels rise so the value of money decreases. The gov’t traditionally combats this with either increasing interest rates, or controlling the money supply which in turn has the affects interest rates. I heard the gov’t printed money during the worst of the recession. Maybe it’s b/c we borrowed that money from foreign gov’ts and needed physical dollars to represent it? Like @Lightlyseared implied?

I’m hoping an expert will clarify.

Captain_Fantasy's avatar

The more money we print, the less that money is worth.

cockswain's avatar

@Captain_Fantasy Then why would the gov’t print money? What would be the logic of knowingly decreasing the buying power of the dollar?

Lightlyseared's avatar

@Captain_Fantasy That is only true when a country employs the gold standard where the paper money represents the countries holding of gold. Most countries now use fiat money where the paper money only has value because the govenment says so.

john65pennington's avatar

In order for The U.S. Government to print money, there must be gold reserves available to back the printed greenbacks. its like your personal checking account. your check is no good without money in your account.

cockswain's avatar

@john65pennington We stopped using gold to back the dollar in the Nixon administration.

ragingloli's avatar

“Then why would the gov’t print money?”
Economies grow. Money physicalyl gets lost (destroyed when your house burns to the ground, falling out of your pocket in the forest, never to be seen again, etc.)

cockswain's avatar

@ragingloli But…why did we print money during a recession then? Just a coincidence on the timing? Otherwise your point makes sense, in that the gov’t (though a mechanism with which I’m unfamiliar) is able to monitor how much money should be in circulation vs how much actually is, then periodically prints the difference. But that also makes me wonder, anyone who keeps “mattress money” or the like would eventually induce the gov’t to print money. And if printing money does reduce the value (not sure if that is true), then hoarding physical cash is a good way to decrease its value, beside the fact it isn’t earning interest as another asset.

talljasperman's avatar

It’s a re-distribution of wealth… people with money are worth less and people who don’t rely or are not on fixed incomes are worth more… also the person who receives this new money is worth more…example everyone’s broke except one person and the government prints money and gives it to everyone… the one previously with more money now has less and those who receives money are worth more.

cockswain's avatar

I think I found the answer here. Printing money lessens the value of the dollar, so prices go up. The Fed started printing money during the recession because deflation was in effect. It was an example of fiscal policy being enacted to stabilize prices. So several of you were correct in that it is essentially a way to force about inflation.

Now I’m sort of confused about something else. During inflation, the Fed will take money out of circulation to drive prices down (I think). Why wouldn’t it just release existing money to combat deflation instead of printing new money? Maybe b/c there isn’t enough in the Fed to counter deflation?

ItsAHabit's avatar

The government has an incentive to print more money when its debt becomes burdensome because it repays that debt (and the interest on it) in cheaper dollars.

redone's avatar

The answer to your question is the study of economics. Lets say you are trying to sell Girl Scout cookies. You really want more for each box because your toop only gets to keep about 25% of the total sale price, and that’s generous. You get 25c for each because they cost about a dollar. You could sell more of them, working on a school night, or you could go to Pavillions, instead of Jons grocery, and charge 25c more per box. That would get you into a whole heap of trouble with the Girl Scout industry, your cookie supplier. So you try selling more cookies by only ordering thin mints and standing in front of Pavillions, instead of Jons.

Next year comes and GSI decides they are going to up the price of the cookies, so you are forced to up the price of each box you sell. Each box containes less cookies. They are automatically of less value, and force Jr. to cut more lawns, or get a real job that pays more, so he can afford to buy his quota of cookies to feed his facination with thin mints and little girls in uniform. Mean while, you still only get to keep 25%. Those sleeping bags at Sears have now gone up in price, forcing you and your girls to sell even more cookies, even though the sleeping bags have not gotten any warmer, and the cookie boxes now contain less cookies. Your customers start to complain. What do you do? Clean up your girls appearance and put them in shorter skirts with funky pigtails to get peoples attention, so they can sell more cookies. Its a loosing cycle, but if you don’t play the game, the girls don’t get to glue those posicle sticks together and paint ceramic gogo dolls while Mr. Jones goes out on the town with Mrs. Brown. Hmmm…

Now say those cookie boxes are actually United States currancy, the horrid dollar bill. And your objective is to earn interest by purchasing and selling stock interest in various companies, so you can take your profit and build a larger 401k or blow it in Vegas w/Mrs. Brown or Mr. Jones, depending on who you like. You want the value of that stock to go up, but sometimes it goes down, for reasons uncomprehensilbe to you, say for example when the U.S. declares war and all the taxes go to building better rifles, although better armour under the tanks might be nice. Then you find out that you can borrow stock from others who are also hoping it will go up in value, when it actually goes down. You turn around and sell it back to those people right away, at $1 a share through your broker, so they don’t figure it out. But in time, they are going to want the stock you borrowed, back. They don’t want the money, cause they are foolish and beleive in long term investment. They want their stock, so you wait a few days, then buy it back at a lower price, say 75c a share, when it drops in value, and give it back to them, keeping your 25% as profit. The kick is that you have to buy alot to make a lot of profit and you need a substantial savings account, just incase that stock goes up instead of down and you have to buy it back at $1.25 per. That darn dollar bill isn’t the profit, so printing more of it is not going to make any more profit, than making more cookies when you can only sell 200 boxes to Jr. a year. However, cutting back on the number of cookies in that box has forced Jr. to buy more boxes at a higher price and learn to flip burgers so he can move out of Mom and Dad’s and become a productive member of our society. Get it? If you don’t, go back to McDonalds and keep flipping those burgers, Jr.

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