US debt ?

Discussion in 'Economy' started by sam111, Jan 28, 2012.

  1. sam111
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    sam111 Member

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    I know the US treasure is responsible in printing US money.

    And we say that we are in debt and the debt ceiling is still going up here and their.

    But what is stopping the treasure just from printing more money...
    I mean now that money is not based on resources like gold what is stopping them from make us all rich in theory?

    Is this just a law or do they just regulate the US amount of money to keep everybody at a certain level.... and in line sort of.
    Obvious if we made everybody reach it would then be meaningless and cause catastrophic stuff... because most people cann't live with in a means that everybody could live together at.... (some like me have no problem with it)

    Very interested in how they come up with how much money we have or when we should print more... obviously this most be based on population , resources , energy ,...social factors ,..etc something to keep people working and at a common goal sort of.
    But is their an equation that the US abides to or do couple people en-power just make an educated guess on what it should be.
    If I would have to guess it is probably an economic math equation the works or is working currently .... when it fails we must mathematically model another equation for the population and living quality...
     
    Last edited: Jan 28, 2012
  2. DSGE
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    DSGE VIP Member

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    First off, the treasury isn't responsible for controlling the amount of money; the Federal Reserve is. The treasury issues debt, called treasury bonds, when the government wants to borrow money to finance some spending.

    So what happens if we printed more money? Would it make people richer?

    The first thing to recognise is that we don't care about "nominal" values; we care about "real" values. If I walk into the shops with $100, I don't really care that the number "100" is on the note. What I care about is how many things I can buy with that $100. If bread costs $50 per loaf, I don't care that I've bought $100 worth of bread; I care that I've bought two loaves of bread. When people focus on the number on the money rather than the amount of real things it can buy, that's called "money illusion".

    Take for example the Japanese yen. One US dollar is worth about 100 Japanese yen. So if a can of coke in the US costs $1, does that mean I can go to Japan and buy 100 cans of coke with that dollar? Obviously not. The price of coke in japan isn't going to be 1 yen, it's going to be around 100 yen. So in both the US and Japan you'll only be able to buy the same amount of coke, despite the fact that the number on the money in Japan is 100 times bigger.

    So what happens if we print a bunch of money and introduce it into the economy? One way to imagine it is if we magically added an extra couple of zeros to the notes overnight. When you wake up in the morning, your $1 note now says $100. Does that mean I can now buy 100 cokes today when I could only buy 1 yesterday? No. Because people selling cokes will raise their prices. They'll add an extra two zeroes to the price of coke. So you'll go down to the shop to get some coke with your $100 bill only to find that the price of coke is now $100. You could only buy 1 coke yesterday, and prices have changed to make it so that you can only buy 1 coke today.

    When the general level of prices rise, that is called "inflation". Increasing the amount of money being spent in the economy doesn't mean we can all buy more things now, it means that we'll get inflation.

    We care about real goods, and real goods are scarce (they aren't unlimited). Say, for simplicity, there's only enough Kola nuts in the world to make 10 cans of coke. Printing money and giving it to people to buy coke doesn't mean everybody can buy more coke, because the amount of coke is constrained by how many Kola nuts there are. The only way I can make more coke for people to drink is by improvements happening to the production of coke. Maybe we find some new Kola nuts? Maybe we come up with new technology to produce more coke using fewer nuts? If we just throw more printed money at it though, all that's going to happen is that the price of coke will rise until the real buying power of the money is restored.

    In the short run, prices take time to adjust and increasing the amount of money can temporarily increase the amount of output (I won't go into it; monetary economics is an entire field that's extremely interesting but very in depth). But in the long run it just turns into inflation. A tiny bit of inflation isn't so bad and can actually help an economy run smoothly (for reasons I won't explain). But lots of inflation is a very bad thing. First, if people are on fixed incomes or hold their wealth in currency, then inflation lowers the buying power of those people (because prices are rising but their incomes are not). It begins seriously damaging economic activity at high rates because real resources and work get diverted from producing productive things that people like to trying to deal with an unpredictable price level. At extremely high rates, called "hyperinflation", it completely ruins the ability of money to act as a medium of exchange and has disastrous effects on the economy. There's the classic story of a man in Weimar Germany who withdrew his pay packet from the bank and had to take all the notes home in a wheelbarrow. He got robbed along the way but the money would quickly become so worthless that they left it and took his wheelbarrow.

    So how do we decide how much money to print? Well the Federal Reserve has an inflation target of 2% (general level of prices rise by about 2% per year on average over the medium term). If inflation is less than 2%, they increase the rate at which they print money; if it's more than 2%, they slow the rate at which they print money.

    Hope that helps.
     
    Last edited: Jan 28, 2012
  3. expat_panama
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    expat_panama Silver Member

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    Authority and responsibility for money and debt is with congress ( from The United States Constitution - The U.S. Constitution Online - USConstitution.net )--
    --and according to The United States Constitution - The U.S. Constitution Online - USConstitution.net the President with his cabinet (including the Treasury) are responsible for carrying out the will of Congress. What happened is that (from FRB: What is the difference between monetary policy and fiscal policy, and how are they related? )--

     
  4. editec
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    editec Mr. Forgot-it-All

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    Money is not wealth.

    It is an agreed upon marker with which we keep track of wealth.
     
  5. DSGE
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    DSGE VIP Member

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    Yes. The power to issue money is given to congress who have delegated that responsibility to the Federal Reserve. [​IMG]
     
  6. expat_panama
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    expat_panama Silver Member

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    Actually, money is still based on valuable resources just like it's always been. All that's changed is that instead of making the dollar buy a fixed amount of say, gold or silver, they peg it to a fixed amount of stuff we actually need: food, shelter, and clothing.
     
  7. DSGE
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    DSGE VIP Member

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    They don't peg it to anything. They keep average PCE inflation at around 2% over the medium term.
     
  8. expat_panama
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    expat_panama Silver Member

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    You're right, and the point that I'm pushing is that while anyone can delegate power, nobody can delegate responsibility. Usually this doesn't matter but with Ron Paul types they seem to be trying to make the Fed look like the bad guy and it's a lie. The fed is just doing what Ron and his gang are telling it to do.
     
  9. expat_panama
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    expat_panama Silver Member

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    That's what 'pegging' is. The Fed varies the value of the dollar so that at any given time it buys a fixed amount of (instead of gold or silver like before) that basket of items that makes up Personal Consumption Expenditures.
     
  10. DSGE
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    DSGE VIP Member

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    Semantics. No thanks.
     

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