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Source link: http://archive.mises.org/17384/its-just-money-printing/

“It’s just money printing”

June 22, 2011 by

James Rickards explains to Becky Quick who gets burned when countries and banks are bailed out.

Quick: You make up the money, it’s monopoly money that you’re playing with. who gets burn in the end? is it taxpayers around the globe that get left holding the bag?

Rickards: It’s a form of inflation, savers, pensioners, people in annuities, average people. same thing happens. I’m saying over time, the thesis of financial repression, we don’t need hyperinflation. 4% a year for 15 years is enough to cut the value of savings in half.

Quick: The people who have been doing the right things by saving money and making sure they haven’t been ridiculous with throwing their money around and buying stupid things, they will be the ones who suffer the most?

Rickards: Yes. that’s how governments get out of this. Having said that, there are alternative pasts including chaotic outcomes. Is the fed out of bullets? they’re not. Historically in ’33 and ’71, you can conduct open market operations in gold, to bid the price of gold up to $3,000 an ounce, all of the other commodity prices adjust accordingly. cheapen the dollar, you cheapen the debt.

{ 6 comments }

JFF June 22, 2011 at 3:57 pm

And in ’20-21 they did nothing and we were out of the hole in almost no time.

“Cheapen the dollar, you cheapen the debt.”

Can someone explain this thinking to me? If you cheapen the dollar via inflation, how is it connected to the debt? Wouldn’t you need more dollars to pay a debt amount that wouldn’t otherwise change? Actually, wouldn’t the debt amount increase with falling dollar value?

Daniel June 22, 2011 at 6:35 pm

It’s an attempt at paying the debt in your own currency before its lessened value gets noticed

And of course, it screws over everybody else and doesn’t work

Ned Netterville June 22, 2011 at 8:46 pm

JFF, If the government “cheapen” the dollar through inflation, which means it expands the money supply (creates more dollars), it does not need more dollars to repay the previously existing debt, which is unchanged by the increase in the money supply. It must repay the same number of dollars, but after inflation it can do so with the cheapened dollars, of which there are now twice as many.

Suppose the money supply is $10 million; and,

Suppose the government borrows $1 million;

Then suppose the government increases the money supply to $20 million by printing an extra $10 million.

As the extra $10 million moves into and through the economy and people find they have more money to spend in their pockets, and assuming the standard economist’s caveat–all other things remaining unchanged–a caveat that never happens in the real world but is necessary in economics in order to analyze the affect of such singular phenomena as monetary inflation, consumers will bid the price of goods up with their inflated dollar holdings. Although the prices of all products will not change uniformly by any means, it is safe to assume that the general price level eventually will increase more or less equivalent to the increase in the money supply, in other words, prices also will double and the value of each dollar will be half of what it was before inflation.

Now suppose the government repays the $1 million it borrowed before it inflated.

The people who lent the government $1 million (they probably did so by buying treasury bonds), when they are repaid with post-inflation dollars will find that their $1 million will now only buy half of what their pre-inflation dollars could have bought when they lent the government the money.

There are many other deleterious consequences resultin. from inflation, but I hope that answers you question.

JFF June 22, 2011 at 9:34 pm

Got it, Ned, thanks. I was thinking too short-term and forgot that the effects of inflation take a long time to work their way through the system. Of course to the benefit of the government and at the expense of everyone else.

fundamentalist June 23, 2011 at 8:13 am

Some people think Becky is being obtuse, but if you watch the show long enough you see she is very knowledgeable and often tosses soft questions to guests who she knows will provide the right answer.

Ned Netterville June 23, 2011 at 2:51 pm

Rickards: Is the fed out of bullets? they’re not. Historically in ’33 and ’71, you can conduct open market operations in gold, to bid the price of gold up to $3,000 an ounce, all of the other commodity prices adjust accordingly. cheapen the dollar, you cheapen the debt.

At first glance, this sounds like something the Fed could do to achieve the desired effect, but maybe not.

In my analysis, I lump the Fed and the US Treasury together as one entity–da US gubbermint. The price of gold between 1949 and 2011 increased from $38 to over $1500 while the US sold over 440 million ounces of gold.

During the period May 1978 to November 1979, the US sold 15.8 million ounces of gold in a series of monthly auctions for the express purpose–yes, Treasury p-r folks actually said this–to “further the U.S. desire to continue progress toward the elimination of the international monetary role of gold.”
The first auction brought a price of $180 per ounce and nineteen months later the last auction realized $372 per ounce. Gold more than doubled while during the government’s futile effort to drive the price of gold down. In terms of gold, the dollar fell to less than half its value in a little over a year and a half!

It is obvious that the government selling gold in the past had the effect of weakening the value of the dollar. Why should Mr. Rickard think that the effect has now been reversed; that government buying gold will weaken the dollar. The empirical evidence conflicts with his assumption.

I contend that recent strength in the dollar price of gold is primarily attributable to the to the awakening of people throughout the world to the intrinsic worthlessness of fiat currencies in general and the dollar in particular. Put another way, what is happening is that gold is ascending by popular demand to its rightful place as the people’s choice of the money that is most secure from government predation.

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