Apropos my post on Monopoly money comes a ‘real-life’ case involving North Korea.
Counterfeiting Cases Point to North Korea:
For 15 years, U.S. officials suspected that the North Korean leadership was behind the counterfeiting, but they revealed almost nothing about their investigations into the bogus bills or their efforts to stop them. Now, however, federal authorities are pursuing at least four criminal cases and one civil.
[...]
The criminal cases and U.S. Treasury enforcement action are part of a concerted campaign to deprive North Korea of as much as $500 million a year from counterfeiting currency and other criminal activities, senior U.S. law enforcement and intelligence officials say.
The officials say criminal syndicates in South America, Eastern Europe and elsewhere have also churned out large sums of fake U.S. cash. But North Korea’s is the only government believed to do so, despite international pressure and laws that characterize such activity as an economic casus belli, or act of war, they say.
But if printing and creating more “money” contributed to the welfare and growth of an economy, shouldn’t the Fed embrace counterfeiting wholeheartedly? It already does via its own presses… What’s the difference between “illegal” minting presses versus legal ones?
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13 Responses
This is actually a subtle area, where economists of the Keynesian tradition get hoist with their own petard. What they concentrate on is the effect on the dynamic economy of having more money circulating. They leave out the effects of wealth transfer and what gets done with the wealth so transferred, all of which varies with who is realising it and in exchange for what.
I’m going to leave out the whole story, but as between North Korean and official US printing of US$, you get enduring differences from these areas:-
- US printing enables the US government to procure goods and services, North Korean printing does the same for them.
- US printing generally does not transfer wealth into enduring purposes (i.e. it does not end up in enduring investments, or if it does that’s only because the US classifies government buildings etc. as enduring investment even though they don’t actually generate funds flows). On the other hand, much North Korean printing of counterfeit currency goes into importing plant and materials for infrastructure, i.e. it does work through to enduring investment (despite the fact that their Marxist planned approach cripples that, nevertheless plant etc. gets built).
A lot of this shows up as opportunity cost, not as direct differences from the past but as differences from the alternatives that didn’t happen. But the Keynesian perspective neglects all these things as immaterial as compared with the consequences of the ideal level of activity from the ideal level of money supply – it looks at the consequences of flow rather than stock.
Even with that mindset, it’s possible to dislike counterfeiting; if you come from the idea that the government is printing the “right” amount of money, then counterfeiters must be causing too much to be printed. Indeed, Keynesians thought that Alves Reis was doing Portugal a favour in the 1920s by his counterfeiting, since they thought that the Portuguese dictator Salazar was too hidebound an economist to print enough money! So, in a way, some kinds of economists would indeed agree with the rhetorical point you made, and say that the US government’s reaction was not inherently sound but rather had a jealous side to it.
if it’s an act of war, can we assume the sophisticated US money system is being used to print and dump counterfeit currencies of regimes we are “at war” against, like Iran and N. Korea? Hmm. I never thought of that. If only Al Quaeda would establish their own money, we could undermine that!
What a lovely compliment for Kim Il Sung to pay to Alan Greenspan and Ben Bernanke . . . immitation is the sincerest form of Flattery.
Baloney. The real reason the US Government is upset is that the North Korean government is gaining financially from this particular stream of counterfeiting, instead of the preferred beneficiaries – the Rothschilds, the Morgans, and the weapons manufacturers. Other than that difference, there is exactly zero additional negative effect on the economy over and above the counterfeiting occurring at the Fed and the US Mint. In fact, since the DPRK is doing all of the printing and circulating of this particular stream of funny money, it can be argued that it actually costs the taxpayer LESS!
- US printing enables the US government to procure goods and services, North Korean printing does the same for them.
This isn’t correct. The Mint does not print dollars and hand them to the government to spend. The Mint prints dollars, and banks exchange their old notes for new ones.
- Josh
well said.
The Government does not exchange old notes for new in anything like a one for one basis. The Government is constantly creating money out of thin air and distributing it to banks and lending agencies FIRST!!! These agencies get first crack at using the new currency before the economy has a chance to react by decreasing the purchasing power of money.
Similarly NK prints money and gives it to itself first on a much smaller basis. So the NK is not doing anything that the Fed and Govt do not do already.
As for a “right amount of new money” that does not exist. The creation of money should be a competition among banks and lenders vs the government. This way market forces will pick those who generate the “right amount of new money” vs the Fed doing it.
The Government is constantly creating money out of thin air and distributing it to banks and lending agencies FIRST!!! These agencies get first crack at using the new currency before the economy has a chance to react by decreasing the purchasing power of money.
This is also incorrect. The government does not create money out of thin air and distribute it to banks. Banks create the money when consumers write cheques or take out loans. The government, as a borrower, does create money but in the same way you create money by taking out a mortgage.
The Mint is not the Federal Reserve. And, technically, the Federal Reserve is not the government.
- Josh
Josh, Just to clarify:
“The government, as a borrower, does create money but in the same way you create money by taking out a mortgage.”
Are you referring to the Open Market Operation buyback of Fed bonds from investors paid for by the Fed with cheques drawn on the Treasury? Just want to make sure I’m understanding you right.
—–
In regards to the blog post, I think what is more immediately pressing is the Bush Administration’s reaction to this “act of war.” Will they use it as an excuse to begin the next round of attacks on foreign governments? Bush and related White House members have been tellingly open with their rhetoric about the “will” of the nation to continue its Righteous Quest for Democracy. THAT scares me.
WOW.
Josh, you need to re-read Murray Rothbard’s “What Has Government Done To Our Money?”. Then come back and try to get repeat that statement with a straight face.
What’s the difference between “illegal” minting presses versus legal ones?
last i checked, the difference is who’s finger is on the trigger pointing the gun at your head.
I’ll restate one of my earlier points with emphasis added, then clarify it: “US printing enables the US government to procure goods and services…”
Whether the new money is created at the point of (excess) printing or at the point of authorising banks to take certain actions is a technical point, largely to do with which measure of money supply you are using. It doesn’t matter too much which you use, for this purpose, so long as you are consistent.
Nevertheless my original point remains accurate. Consider what would happen with a bullion standard if the US government made the same permissions: at a certain point, the banks would turn around for bullion and experience a cash flow problem. This doesn’t happen with a fiat currency, since more cash gets issued; the ability to issue new fiat currency does indeed work as an enabler.
This additional printing is not an identical process of course, but rather a response to feedback processes. There are other things that go on as well, like increases in the velocity of money – but they can only take you so far, and as the burden falls on them the signals arise to trigger the new cash issues.
Consider what would happen with a bullion standard if the US government made the same permissions: at a certain point, the banks would turn around for bullion and experience a cash flow problem. This doesn’t happen with a fiat currency, since more cash gets issued; the ability to issue new fiat currency does indeed work as an enabler.
Do you honestly see this as a positive effect, though?
None of the money supply figures make any difference in the short run — the true inflation of new currency isn’t experienced unless you focus on the market that receives the new money. If a bank has access to it, they also know which markets are ripe for the picking. The big hope that the Fed and the federal government tries to create is that the dollar exit the US economy and stay exited. If the money stays in India or China, they will experience inflation as we won’t see the money return.
If the US produced anything of value, we’d see the money returning to buy our goods. We produce almost nothing, so the money rarely returns. It is definitely a positive for those in power — he who gets the money and is able to spend it abroad before it is worth less than the item/service they get in return.
Of course the big concern is if that money all of a sudden becomes seen as worthless abroad — at which point it could very well come back into the US economy when the foreign holders decide they’d rather by our wheat at US$60,000 per pound since they see no real value in our money. At THAT point we’ll see real problems.
I’m no fan of fiat currency, I live completely on a personal hard money standard (5% fiat reserves). Yet I also have distant family involved in the banking cartels, and I see how well they’ve done on getting the money early, cheaply, and easily — and turned it around for something of value in the world market. Poor suckers still accepting the greenback.