Minyan Mailbag: Can't We Just Print More Money?
Tossing C-notes out of a helicopter would be pretty cool though.
Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.
John or Scott,
Okay - the discussion this morning in the 'Ville has finally prompted me to ask a question that's been on my mind the last 3-4 years. I've posed the question to many co-workers (FC's), friends, and family - however not one coherent reply has been formulated:
If the U.S. Federal Government (via the Fed) can produce "money" anytime they want through our nation's fiat currency system (no objective underlying value), then why are citizens taxed at all (other than for control reasons)?
I mean, if I had the proverbial "money tree" in my backyard in Texas why would I care if you paid your debt to me (other than my desire to exercise penal power over your obligation to pay?) What am I missing? Why would "tax cuts" matter (other than to garner votes from folks who feel like the Government is treating them to a good deal? Of course, all the while this "good deal" is offset due to the printing presses running in the back of the house. The new-found money from the "tax cut" is instead eroded away via inflation (i.e. I give you back your $10 "tax cut" to purchase a prime rib steak only for you to discover that the price of the steak was raised $10 at the steakhouse because of my printing prowess exerting the obvious inflationary pressures).
If I'm not too far off on this, then my main concern is not even so much "inflation-oriented" as much as it is a moral risk. What kind of citizenry allows the power of monetary control to be centralized in one person/entity to control the "money tree?" If you give it to any one person/entity with no checks or balances on that person - especially to someone who wields international influence (i.e. A.G.) - all sorts of moral hazards are introduced. One can use their imagination from there...or just look at the headlines!
Thanks...and keep up the great work.
The Fed and the banking cartel realize that they must have some semblance of respect for property rights (recall that inflation is a tax on creditors - on capital - for the reasons you described below: lenders get fleeced). That, and the motivating factor of self-preservation of power, are what keep the Fed from simply throwing money out of helicopters. That said, a few apt quotes from Thomas Jefferson who spent much time thinking about banking and money:
"If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."
"I, however, place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared."
"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
It is a source of deep regret and lament for me that the progress of scientific thinking has come so far from Jeffersons's time (e.g. semiconductors, flight, biotechnology) but, alas, our insights in matters economic have regressed.
A tax and the creation of money are two entirely different things. A tax is the re-allocation of production, a transfer of "wealth" from one party to another. Citizens give the government that they create the ability to do this for various reasons. A tax does not devalue a currency or dilute wealth; it changes the structure of wealth.
As Scott points out, unfortunately we have given the government (actually the Fed is not a part of the government, but is contracted by the government) the ability to "create" money. Think about if we just added a zero to all denominations of currency: a $100 bill becomes a $1000 bill and everything costs 10 times as much. This is essentially what it does. The reason it does not seem that way, at least initially, is that all things do not filter through the economy at the same rate. The Fed also uses obfuscation in masking the true inflation number. The inane belief that an increase in the money supply above that of the rate of increase in productive assets does anything but devalue the currency is just one of timing. The process of creation of money creates debt as well; new energy is never created in the universe. Real economic growth occurs through productivity and not increasing the money supply.
So a tax re-distributes real wealth. Increasing the money supply over the rate of the increase in productivity devalues the currency.
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