View Full Version : On America - Printing Money

Sunday, December 28th, 2008, 06:44 PM
Printing money – and its price

By Peter S. Goodman , The New York Times

Sunday, December 28, 2008

Borrowing and spending beyond ordinary limits largely explains how
Americans got into such economic trouble. For decades, businesses and
consumers feasted relentlessly, as if gravity, arithmetic and the
tyranny of debt had been defanged by financial engineering.

Armed with credit cards and belief in a bountiful future, Americans
brought home ceaseless volumes of iPods and cashmere sweaters, and
never mind their declining incomes and winnowing savings. Banks lent
staggering sums of money to homeowners with dubious credit, convinced
that real estate prices could only go up. Government spent as it saw
fit, secure that foreigners could always be counted on to finance
American debt.

So it may seem perverse that in this new era of reckoning — with
consumers finally tapped out, government coffers lean and banks
paralyzed by fear — many economists have concluded that the
appropriate medicine is a fresh dose of the very course that delivered
the disarray: Spend without limit. Print money today, fret about the
consequences tomorrow. Otherwise, invite a loss of jobs and business
failures that could cripple the nation for years.

Such thinking carries the moment as President-elect Barack Obama puts
together plans to spend more than $700 billion on projects like
building roads and classrooms to put people back to work. It is the
philosophy behind the Federal Reserve's decision to drop interest
rates near zero — meaning that banks can essentially borrow money for
free — while lending directly to financial institutions. This is the
mentality that has propelled the Treasury to promise up to $950
billion to aid Wall Street, Detroit and perhaps other recipients.

But where does all this money come from? And how can a country that
got itself in peril by borrowing and spending without limit now borrow
and spend its way back to safety?

In the case of the Fed, the money comes from its authority to print
dollars from thin air. Since late August, the Fed has expanded its
balance sheet from about $900 billion to more than $2.2 trillion,
creating $1.3 trillion that did not exist to replace some of the
trillions wiped out by falling house prices and vengeful stock
markets. The Fed has taken troublesome assets off the hands of banks
and simply credited them with having reserves they previously lacked.

In the case of the Treasury, the money comes from the same wellspring
that has been financing American debt for decades: Investors in the
United States and around the world — not least, the central banks of
China, Japan and Saudi Arabia, which have parked national savings in
the safety of American government bonds.

Americans have gotten accustomed to treating this well as bottomless,
even as anxiety grows that it could one day run dry with potentially
devastating consequences.

The value of outstanding American Treasury bills now reaches $10.6
trillion, a number sure to increase as dollars are spent building
bridges, saving auto jobs and preventing the collapse of
government-backed mortgage giants. Worry centers on the possibility
that foreigners could come to doubt the American wherewithal to pay
back such an extraordinary sum, prompting them to stop — or at least
slow — their deposits of savings into the United States.

That could send the dollar plummeting, making imported goods more
expensive for American consumers and businesses. It would force the
Treasury to pay higher returns to find takers for its debt, increasing
interest rates for home- and auto-buyers, for businesses and
credit-card holders.

"We got into this mess to a considerable extent by overborrowing,"
said Martin Baily, a chairman of the Council of Economic Advisers
under President Bill Clinton and now a fellow at the Brookings
Institution. "Now, we're saying, 'Well, O.K., let's just borrow a
bunch more, and that will help us get out of this mess.' It's like a
drunk who says, 'Give me a bottle of Scotch, and then I'll be O.K. and
I won't have to drink anymore.' Eventually, we have to get off this
binge of borrowing."

Some argue that the moment for sobriety is long overdue, and
postponing it further only increases the ultimate costs. "Our
government doesn't have enough spare cash to bail out a lemonade
stand," declared Peter Schiff, president of Euro Pacific Capital, a
Connecticut-based trading house. "Our standard of living must decline
to reflect years of reckless consumption and the disintegration of our
industrial base. Only by swallowing this tough medicine now will our
sick economy ever recover."

But most economists cast such thinking as recklessly extreme, akin to
putting an obese person on a painful diet in the name of long-term
health just as they are fighting off a potentially lethal infection.
In the dominant view, now is no time for austerity — not with
paychecks disappearing from the economy and gyrating markets wiping
out retirement savings. Not with the financial system in virtual
lockdown, and much of the world in a similar state of retrenchment,
shrinking demand for American goods and services.

Since the Great Depression, the conventional prescription for such
times is to have the government step in and create demand by cycling
its dollars through the economy, generating jobs and business
opportunities. That such dollars must be borrowed is hardly ideal,
adding to the long-term strains on the nation. But the immediate risks
of not spending them could be grave.

"This is a dangerous situation," says Baily, essentially arguing that
the drunk must be kept in Scotch a while longer, lest he burn down the
neighborhood in the midst of a crisis. "The risks of things actually
getting worse and us going into a really severe recession are high. We
need to get more money out there now."

Had the government worried more about limiting spending than about the
potential collapse of the mortgage giants, Fannie Mae and Freddie Mac,
it might have triggered precisely the dark scenario that consumes
those who worry most about growing American debt, argues Brad Setser,
an economist at the Council on Foreign Relations.

China purchased a lot of Fannie and Freddie bonds with the
understanding that they were backed by the American government. No
bailout "would have been portrayed in China as defaulting on the
Chinese people," Setser said. That would have increased the likelihood
that China would start parking its savings somewhere other than the
United States.

The most frequently voiced worry about the bailouts is that the Fed,
by sending so much money sloshing through the system, risks generating
a bad case of rising prices later on. That puts the onus on the Fed to
reverse course and crimp economic activity by lifting interest rates
and selling assets back to banks once growth resumes.

But finding the appropriate point to act tends to be more art than
science. The Fed might move too early and send the economy back into a
tailspin. It might wait too long and let too much money generate

"It's a tricky business," says Allan Meltzer, an economist at Carnegie
Mellon University, and a former economic adviser to President Ronald
Reagan. "There's no math model that tells us when to do it or how."

But that, as most economists see it, is a worry for another day. Some
policy makers are focused on staving off the opposite problem —
deflation, or falling prices, as demand weakens to the point that
goods pile up without buyers, sending prices down and reducing the
incentive for businesses to invest. That could shrink demand further
and perhaps even deliver the sort of downward spiral that pinned Japan
in the weeds of stagnant growth during the 1990s.

"Those who claim that sharp increases in federal borrowing and the
national debt would be ill advised at the present time, when the
economy is weakening while deflation threatens, have failed to study
Japan's history," declared the economist John H. Makin in a report
published by the conservative American Enterprise Institute —
ordinarily, a staunch advocate for lean government.

So back to the well Americans go, putting aside worries about debt,
unleashing another wave of synthesized money in an effort to prevent
deeper misery.

"Right now," Setser says, "the risk is not doing enough."

Source http://www.iht.com/articles/2008/12/28/news/28goodman.php

Sunday, January 4th, 2009, 09:57 AM
A grave fear that Britian will start doing the same thing - assuming we haven't already. Tough times require tough action .... not unending borrowing to soften the pain of previous excesses. Or am I mistaken here ?

Saturday, January 10th, 2009, 07:31 PM
I think this is the case for all western countries, but the worst thing is a secret that few know and those who can not say: the states rent the money (but not coin) only from private bankers which are everywhere the true masters of power

Saturday, January 10th, 2009, 07:42 PM
I think this is the case for all western countries, but the worst thing is a secret that few know and those who can not say: the states rent the money (but not coin) only from private bankers which are everywhere the true masters of power

This is very true. In Zimbabwe and other 3rd world countries, the government prints money and then spends this money.

In the US, the federal reserve prints money, and then loans at a discount rate to private banks, who then multiply this via 'fractional reserve banking' and then loan this money to the US government to spend via the purchase of Treasury Bonds.

Saturday, January 10th, 2009, 08:36 PM
Zimbabwe is a country that cannot make the best with its money, but China is a demonstration of what can be done when a state is master of the issue. The real riches are the real goods and the intelligence and the work’s capability of a people while the money is only a tool that represents them and allows the dynamic of economy. The difficulty lies in maintaining the proper ratio between representation and reality.