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Originally Posted by: mallen  Seems like the same sort of gross misunderstanding of how things work as the people who panic about news headlines like "the us borrowed trillions from China" and "the fed printed a half a trillion dollars in money"
Let's look at these two in a little more detail.
1) "The US 'borrowed' trillions from the Chinese. Well,first off this didn't really happen. The us did not go to China and say "can I borrow a trillion dollars, and then sign a loan agreement" like you do when you buy a car or a house. Which makes the next thing that is allways said even more absurd. It's allways followed by a panicked question of "what if they call the loans due" as if somehow they could demand payment and take over the United States with nothing more than the stroke of a pen. When something sounds that absurd, you can bet it is. What happens is, the Fed controls the money supply buy buying and selling bonds. We will get into that in a bit. China, recognizing the stability of the American economy , just like everyone else in the world, buys a lot of those bonds. Far from giving China power over us, it makes them dependant. If America tanks, those bonds will become worthless.(it's one reason why our strong economy is so valuable, we can leverage it to sell bonds) It's telling that in times of trouble, everyone wants to move their assets to those bonds. So no, we didn't really borrow money from China except in a very general sense. We sold bonds some of which China bought.
That brings is to the second panicked statement. That the fed just printed some massive amount of currency. This is usually followed by some comparison to post war Italy and it's declared that soon it will take a wheelbarrow full of money just to buy a loaf of bread. (I suggest buying some flour instead and making a very nice sourdough. When breads going for a million dollars a loaf at the bakery, you can probably bring in a nice loaf of freshly made sourdough in your own oven for a mere $200-$300k. Make a few extra loaves for resale and you can probably net yourself a quick million.) But seriously,it's all a bunch of BS (except the fresh bread which is awesome). First, the it's the Bureau of Engraving and Printing that prints money. Second, the fed does NOT control the money supply by just creating money out of thin air. (And neither does any other agency in the US) They buy and sell bonds.
Consider when there is too much money in the economy. Like anything else in the economy, supply and demand set value. It doesn't matter if your buying a house or bartering chickens for corn. If the supply is low compared to the demand it's proportionately more valuable, and vice-versa.
Money is no different. If there is not enough available, we have deflation. Money becomes very valuable compared to the goods it can buy and prices fall out of control. Similarly, if there is too much money available then it becomes substantially less valuable and prices rise.
The feds job is to regulate this. To maintain a happy medium. If there is too much money, the fed sells bonds. People buy them because they are a safe investment. That money is now taken out of the system. They have good liquidity, that is, you can easily sell them to someone else, but now you have the money and they dont. The supply of money is still reduced. Notice, you never see a headline that says "Fed destroys a half a billion dollars. Its not "exciting" It just leaves people scratching their heads.
But what if there is not enough money in the economy. Well, in that case, they buy back bonds. When the government does that it flushes that money back into the economy. The money supply increases. Deflation is countered by a measure of inflation and the status quo is maintained. So no need to go get a wheelbarrow to carry your money to the bakery.
Of course that's a very simple description. For example, right now the government just spent trillions of dollars. That money of course ends up as a deficit, and you can bet, it will end up being in the form of treasury bonds. The lesson here is that the nations economy ... And the world's... Don't work quite like your household budget does.
But people want tiny little sound bite explanations. Ever had someone ask you a question that has a complex answer and then when you try to give it to them their eyes just glaze over of they say "get to the point". No one wants the real,complex, answer. They want a headline. So when the fed does the routine task of maintaining the supply of money in the economy, rather than a chapter from an econ textbook, they try to translate it, imperfectly , into some concept people can wrap their head around. They print "FED PRINTS A TRILLION DOLLARS" because that's the most complex thing most people can manage to understand.
But explanations like that often lack subtle, and often key details. "FED PRINTS A TRILLION DOLLARS" conveys the part about increasing the money supply, but the nuanced details of what's really happening, and how it all worked are totally lost. It's like when you read "A breif history of time" or watch Michio Kaku and think you understand black holes and quantum physics. You really dont. You just have the illusion of understanding. (Fortunately, economics is a bit more accessable)
How does this relate to "US considering bankruptcy"? It sounds like the same kind of oversimplification. Although not a good idea, there are some, and they are a very small minority in government who think we could "monitize" some or all of our national debt. There are arguments from economists that the damage from doing it might be manageable if it was done carefully. And perhaps there is a hypothetical situation where they might be right and it might be necessary. (University professors love love to speculate like that) Monitizing debt is actually akin to the "printing money thing". To give you a quick sound bite answer, it's kinda like just writing off the debt. If you borrow, and then write it off, then the analogy is making money out of thin air. If on the other hand you borrow responsibly, run into some unexpected financial trouble, and then just that one time, write off your debts and start over, it's analagous to bankruptcy. To take it further, if you do it once your finances and your credit score take a hit, but after a little while you recover. I still think it's something to be avoided. And of course my little sound bite description doesn't explain the nuances of how it would really work. But that's probably the tiny grain of truth in what he was taking about. And no, there are few who actually think it's a good idea. We've had far more troubles than this and gotten through it. but, but, but the right said............. good post explaining it. can't wait for the rebuttal..... hahaha getting the pop corn now....
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