"Adam Corolla" wrote in message
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"Ed Huntress" wrote in message
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"Adam Corolla" wrote in message
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snip
Money is probably the most desired thing there is, because it can be
exchanged for just about anything. So, the varying factor in its value
will be how easy it is to get.
If all the tree leaves and blades of grass became various denominations
of money, then money would be worthless. Not because there's more OF
it, but because it's easy to get. If the government printed five
hundred trillion dollars tomorrow and sealed it all away so no one could
get to it, the value of money wouldn't change even there's a hell of a
lot more of it because it's no easier to obtain. Do you agree?
Now, do you see where I'm going with this? When the government prints
additional money, how does that extra money make it easier to obtain a
given amount of it? Let's say the government opened the vault with the
500 trillion in it and did with it whatever they do with all the extra
money they print (which is what? I don't know.) How does that extra
money make money easier to obtain? Do all companies suddenly give
raises when they find out there's more money in the economy, so that
money becomes easier to obtain? I think the key here is in finding out
what the government does with the extra money. I'll be grateful to
anyone who can explain that to me.
Printed dollars are only a small portion of the "money" that's available
in the economy. Most of it is in the form of demand deposits -- ciphers
on a page, or, today, bits in a computer. The cash is just based on a
calculation of how much of that "money" is needed to keep the wheels of
commerce greased.
That makes a lot more sense to me than the simplistic belief that
inflation is caused by the government printing too much money.
To the extent that monetary policy causes or limits inflation (it's a big
factor), the policy that has most to do with it is the setting of overnight
lending rates -- the rate controlled by the Fed, and the one that gets so
much attention when the Fed makes a fractional change in the rate. Through
an indirect chain of events this influences loans and thus the amount of
money in circulation. There are other factors, such as changes in the
reserve ratios that banks are required to hold, and then a whole variety of
other things that get involved. And then there is fiscal policy.
The simple way to describe it is that changes in the money supply is the
result of how many loans are granted by banks. I would not recommend trying
to understand this by means of messages in a NG. You'll need a good book,
especially to see the theory and the practice of controlling inflation.
The story of money is a confusing and tricky one.
I agree, but the particular questions I'm asking are not very complex at
all:
What does the government do with the extra money they print?
I don't know what you mean by "extra" money. The government prints money to
replace worn-out or damaged money, which is retired. And they print money at
the request of banks, who make a deposit with the Fed equal to the amount of
currency they request. People get their hands on that currency by in turn
making a deposit of their own at a bank that got the currency from the Fed.
The peoples' "deposits" include those that result from taking out a loan
from the bank.
Paper money is not much of an issue. It's reserve ratios and loan policies
that are the big issue.
If you want explanations of all this and you don't want to go for a book,
look around the web. Here's a site that looks like it has good basic
explanations, although I haven't checked it enough to be su
http://wfhummel.cnchost.com/
Is there a particular mechanism (or example of a mechanism) through which
printing more money directly causes the value of each monetary unit to
drop?
It shouldn't take more than a few sentences to answer these questions for
the most part.
There is a common misconception that the government prints currency at its
whim and then tosses it out into the market somehow. That's not actually how
it works. Any currency on the market comes about as the result of a deposit
in some kind of bank. But the currency is just the grease. The questions
you're asking should really be about the gears and wheels: the process of
creating deposits, which are where most of the money is.
There are a couple of ways the government creates money, but, again, that
money is in the form of credit and resulting deposits, in one form or
another. The currency just comes about when someone needs currency for small
trades of various kinds.
Take a look at that website and check the basic entries about what money is,
etc. You'll get the general picture pretty quickly.
It's an interesting subject, IMO. I hope you enjoy getting into it.
--
Ed Huntress