Why Doesn’t the Government Just Print Its Tax Money?
From reader Casey McGrath:
So here is something I have never understood. The government prints our money and then gets it circulating in to the system by loaning it to banks at the prime rate — usually 2 or more points lower than retail lending rates. The banks then loan it to corporations and the public at higher rates, the money is then used to pay employees whereupon the government takes back approximately 23% of that same money to pay for the operation of our government. Why doesn’t the government just keep 23% (or the net equivalent of what they currently make off the public) of the money it prints and eliminate all taxes?
I mean isn’t the taxation system just a means of calculating how much the government can spend so we don’t spend more than we are producing and therefore cause inflation?
That’s not actually how it works. Newly-printed money is put into circulation when the Fed purchases securities (often US Treasury bonds) from banks. The Fed also has to offer securities (also often US Treasury bonds) as collateral when ordering more money from the Treasury. US Treasury bonds are created when the government needs to borrow money.
See http://en.wikipedia.org/wiki/Monetary_policy_of_the_USA#Money_creation for more info.
The reason the government can’t just print money and pay off bills with it is because if an increase in the money supply isn’t backed by an actual increase in productivity, inflation results.
Barry wrote:
> if an increase in the money supply isn’t backed by an actual
> increase in productivity, inflation results.
Actually, inflation results whether there is productivity or not as I understand it. Our system of money is based on debt and spending, not productivity.
Sad. The more debt, the more money must be created to pay-off older debt.
The increase in the money supply is what creates inflation.
Jim Lynn
Jim wrote:
Actually, inflation results whether there is productivity or not as I understand it.
—–
An increase in productivity by definition means an increase in supply and efficiency and thus lowers costs which is non-inflationary.
—–
Jim wrote:
The increase in the money supply is what creates inflation.
—–
I believe that’s only when the Fed increases money supply. With the FairTax trillions of dollars from offshore accounts will come back to our economy. I believe most of it will go directly to stocks or bonds which increases business capital which is used to improve productivity. Thus I believe there will be a tremendous effect of increased productivity without any inflationary effect of the Fed increasing the money supply. I’ve tried to find a historical example, but it’s rare indeed that so much existing money has ever flooded an economy. Hong Kong may be the best bet, but I’ve yet to find the appropriate statistics. If someone does please let me know.
Actually, the Fed does NOT print money. It creates money out of nothing which is then deposited in the reserve accounts of commerical banks who can then loan 90% of that out - Fractional Reserve Banking. This produces an expansion of money supply which we are in-debted to and must pay back with interest. Actually, the government COULD print its own money to cover its National Debt and thus reduce its in-debtedness. As Thomas Eddison said “If a government can produce a $1 bond why can’t it produce a $1 bill?”
If any government printed its own debt-free money to spend INTO the economy rather than banks lending debt money TO it then debt would decrease. This must be done in a measured way so as not to over expand the money supply whcih reduces it’s relative value. Actually money is worth nothing. It only represents an ability to trade in goods of a known value.
See the following site which is rather well hidden which explains the way banks produce money out of nothing and lend it to us with interest. It’s from the Federal Reserve Bank of Chicago and clearly shows how banks via debt and interest run a great scam whereby they generate something from nothing that never really exists and creates a credit for it that is a debt to the borrower. Solution is to have a State bank that creates debt-free money to cover the National Debt.
http://landru.myhome.net/monques/mmm2.html#MODERN
Keep in mind while all these levers, if you will, are being pulled by the Fed to interfere with the economy, there is the Cantillon effect. Meaning as new money enters the system it takes time for the relationships noted by other posters to take place. Put another way, US military contractors, medical arena and others close to the government generally get dibbs on the “new” money. Thus they are producing while buying supplies that are still discounted, as the inflation effect hasn’t taken place. As inflation takes place over time its the “working man” whose salary is about the last thing to increase to keep up with inflation. In other words he is paying more money for the inflated price of good with his “old” salary. Its also the way that the US government “taxes” you, instead of taxing you directly.
People running for office would rather “tax” its people in this insidious way instead of overtly calling for a raise in taxes to fund governmental operations. You wouldn’t vote for them! Its one of the key arguments against a central banking system and moving towards a commodity-backed dollar system. Opponents to the gold standard only go as far as stating “The gold standard is foolish and inelastic.” Yes, it is. Governments can no longer willy-nilly enter wars if they dont have the money in the first place. Opponents would not give rise to this, their comeback would be bitter stating that a gold standard “doesn’t allow for emergency money”. Lincoln needed “emergency money” to start the civil war, Lincoln put the gold standard on halt and wrote checks out of thin air. His agenda was more then just freeing slaves as revisionists teach our children in public schools. As a currently unpopular presidential candidate said in his Manifesto, “If this seems odd, then you understand.” Please reference other posters links to how central banking works in a fractional reserve fiat-system. I am familiar with the posted links and they are credible.
I’m disappointed in my fellow Americans who view the arguments by Libertarians or Nader as “weirdos, strange and too many pie graphs and charts”. Humans often attack what they dont understand. Things are misleading and complicated for a reason; you might have a clue and live in your own best interest. The points I brought up here are specified by scholars from all over the world and throughout American history over the last 200 years. It a simple concept once you digest it. As the current system creates money through the Fed the value of your dollar is diluted and YOU pay the price down the road. An example is how Greenspan was a “hero” for creating the housing boom and now he is a “monster” from the resulting bust from easily had money going to unsophisticated investors who all jumped on the housing bandwagon. In certain counties in Florida and California, towns are virtually created by peoples investment homes they bought with this “new” money, yet no one is around to rent or buy. My condolences to those who didnt see the forces at play, got into the industry and are now broke looking for work. Some have even lost their life’s savings. Dont inconvenience some college professors with this reality as pro-central banking is in vogue and pays $$ in the form of their supportive work being printed in lemming-journal publications. In their ivory tower, there are no victims. As they would have it, with a smiling face, “Efficient markets fix themselves as resources get properly reallocated.” Yea, bud, that takes time. Try telling that line to the guy with a cup in his hand.
Why can’t we just print more money that is only spent on things like roads or army and then just lower taxes. Why would we have to pay more money for soemthing if its just for the gov.?
There is a finite amount of precious metals in the world and if all major currencies suddenly decided to become precious metal backed there would not be enough precious metals in existence to cover the existing value. Countries would find themselves having to strip mine the entire planet just to back the major currencies. Instead, I could support a value based currency where currency is issued based on the overall value of the economy. In this model, one dollar would be more like a piece of stock in the overall economy, similar to stock in a corporation. You could still have inflation or deflation with this model, however, there have been precious metal backed currencies in the past that experienced inflation or deflation.
For example, if you had a precious metal backed currency, it would be very difficult to back the value of a company like Microsoft. Microsoft created a lot of intellectual value in the form of software and I am not sure you should back intellectual value with gold or silver. Value takes many forms, precious metals is just one form.
The government could also issue currency to cover the cost of building public infrastruture such as roads, bridges, etc. The underlying asset for the currency issued to build the infrastructure would be the roads and bridges themselves.
I also think issuance of debt as a way to create money supply is a valid method if used properly. For example, mortgages. Mortgages cause assets to be built, people’s homes, business properties, etc. As long as a proper lending policy is in place so that you do not loan money to people with poor credit, etc., an expansion of the money supply via this method can be valid.
Overall, I believe the days of precious metal backed currencies are over. The value of worldwide economies far exceeds the value of all precious metals ever mined. This is really a first in the history of human civilization, economies have never been this robust in the past on a worldwide scale.
GDI wrote:
“There is a finite amount of precious metals in the world and if all major currencies suddenly decided to become precious metal backed there would not be enough precious metals in existence to cover the existing value.”
I don’t see this as being true. If we re-introduced our monetary system to once again be backed by gold and silver (as it is prescribed to in the Constitution), goods and services would take up their place in the market equitable to their value. Having a finite amount of precious metals would simply mean we would have constant deflation as products or services become cheaper as compared to other available options in the market.
GDI wrote:
“Overall, I believe the days of precious metal backed currencies are over. The value of worldwide economies far exceeds the value of all precious metals ever mined.”
This cannot be true. Every good, product, and service has a value. While it may be valued by our economy in a dollar amount that’s constantly being inflated, our stock market still measures itself against the price of gold. This is why ever since we left the gold standard, it costs more and more (in dollars) to buy the same quantity of gold. So while it seems that our economy is much too large to be confined by precious metals, it still is. It’s just through inflation that an ounce of gold once confined to about $21 an ounce in the early 1900s is now worth over $800 an ounce. Having a gold backed economy would make everyone more accountable to what their spending. The government could not bail all these corporations out, create more debt, and expect the taxpayer to pick up the cost through either through inflation or through more taxes. Oh, it’d also be nice to have pennies worth something again rather just having them cost more to produce than they’re actually worth.
“There is a finite amount of precious metals in the world and if all major currencies suddenly decided to become precious metal backed there would not be enough precious metals in existence to cover the existing value. Countries would find themselves having to strip mine the entire planet just to back the major currencies.”
You are missing an important point when you say this. To revert to a metallic based currency, all we would need to do is to re-value the metal (gold in this case) to the amount of currency in the system divided by the amount of gold in existence. That would put gold at about $40,000/Oz.
The main problem, as others have mentioned above, is the debt base monetary system. Bankers get a hell of a free ride and control all governments in the G8 economies, sucking the lifeblood of our billions of workers. In Canada, we have a 500bn debt, and so far have paid over a Trillion in interest to wealthy individuals. Out of the 500bn, only 100bn was used in government sponsored programs. The rest in compound interest. I can’t imagine what those numbers are in the US. Ask Paulson the crook.
Obviously there are many problems with the current world financial system. The USD is the de facto reserve currency, and the US is the world’s only superpower. Consequently the US controls all world economies. The current world liquidity crisis is one example of the power of the US in play. No country is large enough to say that there is a better way. Japan showed the world what not to do, and yet the US did exactly that. It propped-up an overpriced stock market. They want a one-way street – ever increasing asset prices. Obviously, this will end in disaster, because those assets will return nothing – which is the whole idea of having capital. Don’t believe me – just look at the Fed Funds Rate. Look at the JCB funds rate. As a result, saving for retirement is a useless illusion. What sort of return are people getting on those McMansions? No one is going to fix this problem because they want to stay in office. What is the end result? I think that it must eventually disintegrate. That disintegration will be a collapse of asset prices and a massive US recession. Why you ask? Because, there will be insufficient funds to fund essential services. At the top of the list will be pensions. People talk about healthcare being a looming problem, but it is not a problem (financially) if you don’t use it, albeit that you may die. Seriously though, the healthcare industry although essential, is overused. Most people in the doctor’s surgery should be simply told to change their diet, exercise, and lifestyle regimes. I am not saying that there are not many people with serious healthcare needs and that this increases as we age. What I am saying is healthcare (doctors) in general is overused and abused. Sorry to digress with that, but it is part of the problem. In my humble opinion, pensions can never be funded completely through investment. Why? Because with the amount of investment required, returns will be zero. Therefore, what is needed in addition to investment in pension funds, is an efficient economy that can contribute to pensions through taxation. Obviously we do not have that – budget deficit, trade deficit, inflation, unemployment, housing crisis, financial crisis. My point is that none of these things are being addressed. We have seen the disintegration of the US economy as a result of plenty of cheap money, and their solution is to provide more of the medicine that created the problem – cheap money. Not only that, but the government takes over all of the losses caused by the failed policies of the Fed. I know that there are many intelligent people involved in these decisions, and I know that they all know much more than I do, so why do they do it? The only answer that I can find to that question is “crony capitalism”.
I can’t believe in the 21st century we are still using paper money.
yeah, but this is bullshit.
first of all, it should be, and basically is, that money is for productivity. but thats products, and resources is what that is. so for example, one gallon of clean filtered drinkable water costs so and so much.
inflation does happen, so to try to hold it back doesn’t work. but i guess its just like whatever, it doesnt matter. what matters is that people can afford and can get water, food, shelter etc., and more importantlt that transactions are taking place.
so since the government prints money, it should also make (set up) resources, so you can give the money back in exchange for goods. and people buy from your store, they should make clean water, housing and food.
we should of course immediately pay off all debt completely NO MATTER AT WHAT COST. AND DO IT NOW. any debt paying for debt loaning whatver BULLSHIT to pay off old debt is nonsense, and that is what fucks everything up, economically.
this brings us to look at the global scale. militarily.
to be powerful militarily takes airplanes of the latest and newest, and carriers.
more important reliable and proven planes, and their carriers.
thats just to ensure you cabn fight back globally to a country that starts trouble unto everyone else. can kick his butt so he stops fighting or causing trouble.
it really is those giant government projects that governments want to make that create these masses of money amounts, and necessitate bonds and that surplus and debt and all that. millions upon millions of dollars. or trillions or billions.
its really quite complicated, and its really what people believe in and what they want to do, that shows us what we put value into, and what we save or spend these trillions on.
big ideas and big projects by the government take big amounts. and it all goes economically -out the door- because of those big things.
and its the same in the detail view. (one individual person) if i go and buy a car for 65 k, now i have ot pay it off and that will take time, and lots of my earnings. and then i will be in debt to my company, as a slave to them until its paid off, and many people will at that point get another one and the process continues, over again, its relaly what do we want to do and how much do we want to push ourselves to do something.
so its like if we value having no national debt, then we can do that, become free of that. if we don’t care, then it will just be there, the national debt will be there.
keep in mind that no one person is solely held responsible for this “national ” debt. so, it just continues. if one person would be held responsible, that’s different.
one individual person probably has been in debt and almost out of money several times, but he has income sources he is waiting on. when they arrrive he has more money to continue on. if he gets more, he will spend more. if he gets less he will spend less. normal.
so part of it, really ,,,, is having less money, not more. if you are goven more, you will spend more, and then when it slows down, then you are in trouble cause yuor are used to having more.
of course with a one time need, you put money into a one time thing. like buy a van. once you have the van, you have it. you spent 10 grand and now you have it. you dont need 10 grand any more. you only need 20 bucks for fuel.
this is the marvel of the modern age.
Seriously though, the healthcare industry although essential, is overused. Most people in the doctor’s surgery should be simply told to change their diet, exercise, and lifestyle regimes——————————-
exactly. but they dont get paid for that. the surgeons etc are corrupt. they get paid for operations, not by maintaining people.
so part of it, is working for a nice, not corrupted system.
you be healthy yourself, and there you go
its when people ask for more than thwy should be asking for that things get pushed. pushing the envelope
I still don’t understand what would happen if the government overflooded the market with money, and kept the inflation under control. Inflation always happens, and as long as is under control I don’t see the problem. The banks would have enough money that they would loan to people, businesses and therefore economic expansion would occurr, and most important it would be better for Full employment to be 0% than 3 - 4 percent. Three and four percent means that hundreds of thousands of people can’t find work.
Jim,
If the government “overflooded” the market with money, that would be, by definition, inflationary. Full employment, whatever number you want to pick (I believe it currently is defined at between 4-5%), doesn’t mean that people can’t find jobs. It means that they are currently between them. The difference is the employee’s choice to discriminate between jobs they are choosing.
Even if you accept inflation, flooding the market with money doesn’t necessarily lead to employment. We learned that lesson from the 70’s stagflation.
Hi Andrew,
My main point on my previous email was not about he unemployment.. which is another discussion. The main point was what would happen if the government flooded the market with money, so everyone had enough money to buy whatever they wanted to buy? Stagflation is inflation with unemployment but just think why would we have unemployment if businesses could get loans, and the majority of people had jobs with good salaries which in return would mean good consumption from their part? The problem that I see is that everyone says spend money but they don’t give you the money to spend. How can you consume that way?
Jim,
Unemployment isn’t my main point either. “just think why would we have unemployment if businesses could get loans” That was the thinking in the 70’s, but they did have unemployment. Why? Because a business doesn’t take a loan just for the sake of taking it. The upper end of the income spectrum was so punitive within an economy that basically had no certainty about the value of money that a lot of business didn’t want to take the extra risk. It wasn’t until the Fed Chair, Paul Volker, raised rates to control inflation and Reagan, lowered the punitive progressive income tax, that the economy began to turn around (after the recession of the early 80’s).
If the government puts more money into the economy without any increase in production, that is by definition inflation. Zimbabwe is a modern example of what happens when a government follows the course you suggest.
the goverment takes part of the taxes and uses it to make money. because it takes 4 cents to make a dollar.they make dollar bills 4 by 8 witch makes it cost $1.28.
Its the government were talking about they listen to our calls they have hidden cameras everywhere and they know they can print their own money. But they dont because its just another way to screw over the taxpayers out of their money because they dont want us having all that extra money. They will never know what its like to be a taxpaying average person because they are so consumed by power and money.