Flutterby™! : Printing Money

Next unread comment / Catchup all unread comments User Account Info | Logout | XML/Pilot/etc versions | Long version (with comments) | Weblog archives | Site Map | | Browse Topics

Printing Money

2010-11-04 22:39:34.924872+00 by Dan Lyke 7 comments

John pointed me to the Federal Reserve's announcement that they're going to print $600 billion dollars. Here's some too tired musings I wrote on a mailing list recently:

So here's the best rationale I've come up with, with economically ignorant abstractions 'cause when I'm writing off-the-cuff that's who I am:

In an old style backed currency, if the money starts to lose value (inflation), you can buy some of it back with the currency backing (ie: gold, conch shells, whatever). If it gains value, you decrease the money supply by buying the backing material (or other people do).

In a central bank style currency, that backing is labor and productivity. It's a guess at how much people are going to produce. So if the money starts to gain value (deflation), you want to buy the backing material. Which is productivity.

Terry Pratchett plays[Wiki] with this idea in his satire Making Money[Wiki], in which the hero stabilizes the money supply (and international relations) by identifying a reserve of productive capacity and then using the idleness of that ability to produce as his currency backing. (Trying hard to avoid spoilers, because the book is very worth reading.)

You can't tell people to produce more (or, you can, but it doesn't do any good), but you can try to convince them that their production will be rewarded by giving them something up-front, to try to kick up the productivity. And the way to do that is to buy some of that productive capacity back. If nobody's selling, you do that by borrowing from the future productivity.

Of course the problem is, as others have suggested, if you guess wrong you can go too far the other way and end up with inflation.

Which is why I'm normally extremely debt averse, but right now am pretty happy to take whatever they'll loan me at fixed rates.

[ related topics: Books John S Jacobs-Anderson Theater & Plays Work, productivity and environment Currency Economics Terry Pratchett ]

comments in descending chronological order (reverse):

#Comment Re: made: 2010-11-07 17:52:23.01041+00 by: Dan Lyke

Removed the superfluous dollars. Although at that scale I think it doesn't really matter if it's $ or $2.

#Comment Re: made: 2010-11-06 10:42:03.465751+00 by: DaveP

other_todd, there were very good explanations of how money gets "made" in Panic which I recently finished reading.

The Federal Reserve buying up bonds may or may not have a large effect on the total money supply - a lot of it depends on what multiplier those additional dollars end up having. If commercial banks don't feel confident enough to loan money from their reserves, it won't have much of an effect; the multiplier will be low, and the Fed will basically be trying to push on a string.

During the recession of the early 90s, I borrowed quite a bit of fixed-rate money to improve my life (first ever new car, first "good" home computer, etc.) and paid it all off as my income rose during the 90s. I also put quite a bit of money into my first retirement account.

During the early 2000s recession I was running my own business and taking advantage of the fact that companies that were reluctant to hire employees were plenty happy to hire a contractor. And as we came out of that, I bought my first house (using much of the money from that first retirement account).

But I'm unsure which way things are going to swing on this one, so I'm not taking on bunches of new debt. I'm was more heavily into stocks (in my second retirement account) when this recession hit than I should have been, so that contributes to my feelings of uncertainty. At this point, I'm guessing that I should stay heavily in stocks until things have recovered, and then start shifting investments to bonds. I'll also be getting closer to retirement, and a more "conservative" strategy is probably called for.

But for me, the biggest worry I see is that the boomers are going to start retiring soon, and I'm on the very tail end of that. As they start pulling money out of retirement accounts en masse, there's going to be a lot less liquidity in the markets, which might cause another recession just about the time I'd like to think about cashing out. I'm just not seeing a good solution to that problem yet.

#Comment Re: made: 2010-11-05 22:18:09.187464+00 by: meuon

heck.. I see it elsewhere enough to be very scared. We know and have foreign utilities that won't take their own national currency.

#Comment Re: made: 2010-11-05 20:56:03.553887+00 by: petronius

Other Todd: Your point about the value of money is always a problem I have when reading history. In the Sherlock Holmes stories a person can live frugally but comfortably on 100 pounds sterling a year (sorry, numbers and words), but today would need several thousand pounds for the same level of living. Of course, Queen Victoria herself couldn't have purchased a laptop for any number of guineas. One has to figure out a "Market Basket" to determine how much $100 was worth in 1800, 1900, and 2000 to make any sense of it.

As to hyperinflation, I think enough people still have the heebie-jeebies from the Carter years to avoid big-ass inflation like the Black Plague.

#Comment Re: made: 2010-11-05 20:17:18.687148+00 by: ebradway

6.0 x 10^11 dollars

I, for one, welcome our hyperinflation overlords. I'm currently leveraged to the hilt with fixed-interest loans and employed by the Federal Government. My pay increases are matched to Congress and always follow inflation.

#Comment Re: made: 2010-11-05 15:22:36.863534+00 by: other_todd [edit history]

My editor brain, which I normally manage to squelch, keeps stumbling over the "$600 billion dollars," insisting that you can have either a dollar sign or the word "dollars" but not both. (It also was taught not to mix digits and words when providing numbers, so it insists it should be either "six hundred billion" or "600,000,000,000.")

It might be just as well that I get stuck there, because people have attempted to explain the currency market and international currency economics in the abstract, and they all run aground on the shoals of my brain every time. I simply cannot understand money except in terms of purchasing power and/or purchasing-power parity (I understand the Economist's Big Mac Index, for example).

If someone wants to explain to me how/why printing more money makes the goods and services I purchase more/less expensive in dollar values, that would be meaningful to me - but in terms of the "value" of money, I am capable of seeing no value to money other than what quantity of concrete things you can trade it for.

#Comment Re: made: 2010-11-05 13:54:46.284743+00 by: andylyke [edit history]

Yeah - It's called "quantitative easing". Murder is also known as "relief of life". I lived briefly in Berlin in 1993, and got to talk with some oldsters who recalled the 1920s. I got to understand, second hand, the significance of postage stamps from that era which were originally 10 pfennig, overprinted 10 millard (billion) marks. That was "quantitative easing" aka "hyperinflation". I wish the Fed the best of luck.