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[Sheb]

Okay, so I had this idea trotting in my head this whole time, but I ain't no economist, so basically I'm asking you to shoot it full of holes so I can see what's left. Science-style.

so let's get started. In a healthy economy, your money supply need to grow a bit faster that GDP growth, otherwise you get deflation which is a Bad Thing™. Not too fast of course, or you get inflation, but you want it to grow anyway.
Now, there is basically 2 ways to increase the money supply. The first one is basically to print money and have the government spend it in some ways. It was the traditional way to do things but I don't think I need to tell you what happen when you let politicians handle a machine that let them have cash now at the cost of inflation during their successor's term. So this way was phased out during the 1970's and 1980's. In Europe, the interdiction to print money ended up enshrined in the Maastricht treaty. Nowadays the closest thing we have is Quantitative Easing, that is the Central Banks buying sovereign bonds. The money still go to the government's coffer, but as loans, thus increasing the sovereign debt.

The second way is debt. It might surprise you, but banks actually don't have most of the money they lend. While they do need to have a percentage of their loans in real money, they can just lend you money they don't have. This way, every time you take a loan, you help creating some money and increasing the money supply. Now, the bank do need to have a percentage of "real" money, but they can just borrow it from the Central Bank. Needless to say, when banks borrow, that's another net cash creation.

Now I think you start seeing the problem. The only way we have to increase the money supply is debt. What we saw in the crisis aftermath in the U.S. was a huge rebalancing of debt as the federal governement effectively took over private debts. All the talk about "closing the deficit" is one big bullshit, as closing the deficit without contracting the money supply would require the private sector taking on huge amount of debts. Someone has to be in debt for the economy to work with our current system. And as the money supply increase, overall debts levels increase, no matter how austere we are. (Except if you crash the economy, then you don't need that much cash to buy your reduced output).

So what we need to do is clear. Print money. Print money for as long as the inflation is low enough. It's free money, but you can't depend on it, since we need to be able to cut the new money flow whenever inflation get a bit too high for our taste. My suggestion would be to pour that money in a state-owned investment bank, that would loan to business and invest in stuff like infrastructure. Another alternative would be a sovereign wealth fund, but Europe and the US are big enough that you don't need to invest in foreign companies.

Now, it is 2 am over here, so I might be a tad incoherent. I welcome your criticism.

[PanH]

Some people also support that govermnent debts be erased (and yes, godwin, but fuck godwin), which is kinda similar.

[Urist McScoopbeard]

Well, just thinking about that (not a macroeconomist myself) it seems that inflation directly varies with amount of available cash, the thing is the more money you print the more devalued it becomes so I think that the value of the money would reach an asymptote before the debt could be payed. IE.) You could never print enough money. Not sure though, thats just a theory

[frostshotgg]

Why exactly is deflation a horrible thing that must be avoided?

[kaijyuu]

Why exactly is deflation a horrible thing that must be avoided?

Because it becomes profitable to not spend your money instead of investing.

Think of all the Scrooge McDucks in the world. Currently they invest their ridiculously large sums of cash because if they keep it all in their money banks, it loses value due to inflation. If they start to gain money by letting it sit there, then of course they're going to let it sit there.

[Zyxl]

I ain't no economist

huehuehue
nor am I

Print money. It's free money... pour that money in a state-owned investment bank, that would loan to business and invest in stuff

I follow you right up until this. We should direct the new money that is printed to control inflation/deflation towards loans with that new money to reduce the number of investments drawn on independent credit alone? Although on occasion money is expanded or contracted in the interest of inflation/deflation, I really don't think it's as significant, frequent, or sufficient as you suspect to make a major economic impact even if it was loaned out at the expense of an (effectively) micro-tax on everyone using the currency.

The only way we have to increase the money supply is debt.

I think you mean "The only way to increase the economic output is debt", confusing GDP with actual dollar bills floating around where they are only representative at any moment of a fixed supply of goods and services to be traded.

closing the deficit without contracting the money supply would require the private sector taking on huge amount of debts.

I don't immediately see the connection between contracting the money supply and the private sector having to pay their own debts.

crisis aftermath in the U.S. was a huge rebalancing of debt as the federal governement effectively took over private debts.

Actually a number of those were loans, some of which have already been paid back in full with interest. In fact there was/is a lawsuit against the US goverment for charging too much interest being headed by a number of banks IIRC. I think the system isn't far from what you were thinking of, though I'm still not certain of the money loaned being directly from the expansion of the money supply being as significant or different as you think. IIRC federal banks and federal bank loans are the proxy the US uses to expand (or contract) the money supply.

[Sheb]

Ahah, now it's 4 am, so I get to be even more confusing!

I follow you right up until this. We should direct the new money that is printed to control inflation/deflation towards loans with that new money to reduce the number of investments drawn on independent credit alone?

Uh, right. Doesn't make much sense to lend that money, the only difference would be the lower interest rate.

I think you mean "The only way to increase the economic output is debt", confusing GDP with actual dollar bills floating around where they are only representative at any moment of a fixed supply of goods and services to be traded.

No, I'm speaking about money supply. A carefully managed money supply is necessary for a well-functioning economic machine, but it's not the same thing.

I don't immediately see the connection between contracting the money supply and the private sector having to pay their own debts.

the way things are, each time someone take a loan money is created, and each time someone pays it back money is destroyed. If everyone pay all its debts, we contract the money supply.

Actually a number of those were loans, some of which have already been paid back in full with interest. In fact there was/is a lawsuit against the US goverment for charging too much interest being headed by a number of banks IIRC. I think the system isn't far from what you were thinking of, though I'm still not certain of the money loaned being directly from the expansion of the money supply being as significant or different as you think. IIRC federal banks and federal bank loans are the proxy the US uses to expand (or contract) the money supply.

I'm speaking not only of the banks that were bailed out, but also of all the debt held by citizens. They all paid it back after the crisis (because suddenly betting you'll be able to pay your credit card debt in the future seems like a bad choice). As a response, the government spent stimulus money, as well as unemployment benefit, welfare, food stamps etc etc, in effect paying for the citizens' debts.

As for the difference it'd make? Well, tons and tons of cash. Really. Plus an end to today endless budget cutting and following lacklustre growth, prompting more austerity.

[Reelya]

The second way is debt. It might surprise you, but banks actually don't have most of the money they lend. While they do need to have a percentage of their loans in real money, they can just lend you money they don't have. This way, every time you take a loan, you help creating some money and increasing the money supply. Now, the bank do need to have a percentage of "real" money, but they can just borrow it from the Central Bank. Needless to say, when banks borrow, that's another net cash creation.

There's actually a little "trick" to this: usually the laws says banks are allowed to loan out e.g. 90% of their total deposits (e.g. gotta keep 10% as fractional reserve), regardless of where the money came from. Just the balance of deposits to loans, not how much "actual money" the bank possesses, which is something different.

They tend to get it from central banks because the interest rates for licensed banks are really low. But when a loan is taken out, 2 accounts are created: the loan account (a debit owed to the bank), and the value in credit that you can spend. Now, this credit needs to be deposited in a bank account somewhere, so effectively, the bank's total deposits are now 190% of what they used to be. the bank can now lend 81% again of the original deposits. This gives you a geometric series with a limit, based on what % of each deposit you need to "put aside". I think for a 10% reserve by law, the total ends up being 1000% of whatever the bank originally borrowed from the Central Bank.

[Gervassen]

Printing money is cool, I guess, but it never worked long-term for Argentina or Zimbabwe or Venezuela... Nothing that's coming down the road for the first-world nations is really such a deep dark mystery. We've seen this stuff play out in numerous third-world shitholes, but we arrogantly think unserviceable debt being printed away is something we alone can uniquely manage to accomplish without disaster, because we are special. We are entitled to things being different this time, because we first-worlders are the aristocracy.

Think of all the Scrooge McDucks in the world. Currently they invest their ridiculously large sums of cash...

That's a cartoonish view, both literally and figuratively. No matter how the wealth is distributed, whether equally or inequally, an incentive to not invest and not spend will play out the same way, whether one Scrooge or a million Joe Averages are making the economic decision. You couched that in gratuitously divisive language, and basically just want to demonize without understanding the real principles.

From the point of view of an average Zimbabwean, all first-worlders are overreachingly greedy Scrooge McDucks expecting our money to behave differently than his money, despite pulling the same printing shenanigans. He can rest soundly knowing that we merely delude ourselves.

[10ebbor10]

So what we need to do is clear. Print money. Print money for as long as the inflation is low enough. It's free money, but you can't depend on it, since we need to be able to cut the new money flow whenever inflation get a bit too high for our taste. My suggestion would be to pour that money in a state-owned investment bank, that would loan to business and invest in stuff like infrastructure.

The UK does that currently. Doesn't seem to have much effect for now.

Oh, and I believe the ECB has the capabilities of printing money. They're aiming for a inflation rate slightly below 2%.

Oh, and deflation is not a bad thing per se, but it's often a symptom of an underlying economical problem. Examples are money scarcities and such.

[GreatJustice]

Why exactly is deflation a horrible thing that must be avoided?

Because it becomes profitable to not spend your money instead of investing.

Think of all the Scrooge McDucks in the world. Currently they invest their ridiculously large sums of cash because if they keep it all in their money banks, it loses value due to inflation. If they start to gain money by letting it sit there, then of course they're going to let it sit there.

So what? People still invest their money because the rate of return in an enterprise has a good chance of being higher than keeping it in the bank regardless of deflation. The late 1800s were characterized by deflation, but it would be nuts to imply that the 1880s were a period of slow economic growth. Deflation, when it isn't actually caused by a direct contraction of the money supply (say, rounding up money and burning it), reflects an increase in productivity and results in lower prices, benefiting just about everyone. In the context of interest rates, higher interest rates are a sign that capital is running low and people need to save to begin long term projects later, while low interest rates indicate that there is plenty of capital stored for investment and that companies should begin expanding production.

What central banks of today do is print a certain amount of money per year to lend out to commercial banks, which "sets" the interest rate. Since central banks like to have positive GDP growth consistently (a flawed statistic for what they're looking for, but that's a different problem), they naturally set interest rates unnaturally low so as to stimulate investment and lend out the newly printed money to the banks. Naturally, whoever receives the money first, in most cases the government, banks, and larger corporations, end up better off because they received the money when it was still valuable and hadn't made rounds in the economy yet, while those who receive it last actually end up worse off. Investors and companies, in turn, begin expanding production and long term projects, like, say, housing construction, in the mistaken belief that the economy is far stronger than it is in actuality. After a point, someone figures out the resources for these projects don't exist, that it is impossible for them to all be finished without contractions in other sectors, and thus the bust begins. At this point, one of two things happens: either the unproductive ventures are liquidated and the economy realigns to more sustainable lines of production, or the government steps in and keeps those unproductive ventures going, postponing the inevitable correction and making it that much worse when it comes around.

[alamoes]

Quoting above.

In the 1700s a lot of people minted new money.  In the 1800s they stopped because money was plentiful at the time. 

Good example is the US.  They had to mint for the war, and had an atrocious debt.   Then they somehow got out of it in some 10 years. 

Another good example is Britain.  Their economy was in shambles from inflation and the expenses their colonies required.  So eventually they fixed it with the factory, and continued making money as value was increasing faster than they made money.  That is my understanding of the economy, but sadly I'm not that guy from mad money.  My expertise lies in warfare, logistics, and social movements.  Which forces a minor economic knowledge, but still, most of modern economics goes right over my head. 

[Sheb]

Gervassen, as it has been pointed out, the Federal Reserve among other is currently "printing money", only in a way that increase overall debts levels since it's only lending, notably to the government. Doing the same, but giving that money to an investment fund rather than using it to pay government debt would result in the same rate of inflation, with lower debts levels. We are already avoiding what the Zimbabwean did, I don't see why we wouldn't if that money was free.

Also, you've failed to address my point, that is that in a world where debt is the only way to increase the money supply, we're bound to increase overall debt levels if we want to avoid deflation and/or recession. So there is no way to actually cut the deficit without someone else taking up debts and/or the economy receding.

GJ, what would you propose as a way to manage the money? I'm expecting something along the line of private money, but it seems like it would add a lot of transaction and uncertainty costs to the whole economy. It's probably going to turn in a de facto monopoly, except with the money supply now in private hands.

[GreatJustice]

Gervassen, as it has been pointed out, the Federal Reserve among other is currently "printing money", only in a way that increase overall debts levels since it's only lending, notably to the government. Doing the same, but giving that money to an investment fund rather than using it to pay government debt would result in the same rate of inflation, with lower debts levels. We are already avoiding what the Zimbabwean did, I don't see why we wouldn't if that money was free.

Also, you've failed to address my point, that is that in a world where debt is the only way to increase the money supply, we're bound to increase overall debt levels if we want to avoid deflation and/or recession. So there is no way to actually cut the deficit without someone else taking up debts and/or the economy receding.

GJ, what would you propose as a way to manage the money? I'm expecting something along the line of private money, but it seems like it would add a lot of transaction and uncertainty costs to the whole economy. It's probably going to turn in a de facto monopoly, except with the money supply now in private hands.

Free banking would do it, which would be, as you said, "private money". The US has a system approximating that before and after the Civil War, though the states themselves chartered the banks which led to a lot of problems (specifically, the state would cut the bank's reserve requirements and give it favourable status if the bank in turn gave the state cheap loans). The banks themselves would issue currency and the other functions of the Federal Reserve (lender of last resort) would be performed by clearing houses. If one bank's money was being overproduced, people would be able to switch, limiting the damage in a way that's impossible with a monopolistic fiat currency system. Finally, the interest rate would fluctuate in a way actually reflecting the state of the economy, allowing for realistic and sustainable growth.

[10ebbor10]

Doesn't that mean you'd end up with hundreds of different currencies, each with their own fluctuating values, places were they are and were they are not accepted, and all that trouble involving switching currencies. Though I suppose it might work better in a digital environement.

Either that or you'd end up with a monopoly and some minor currencies, I suppose.