Thue asks stupid basic economics questions

[Thue]

So I have a few questions:

Where will the $700 billion (at a time...) for the current bailout come from? Since the Federal Reserve issues money, can they not just say "*poof* - we now have $700 billion"?

By that line of though, why does the United state government have debt at all? If the US has a $400 billion deficit, then why not just magically have the fed create $400 billion in $100 notes, and pay with that?

[Ecthy]

Inflation.

[Imran Siddiqui]

I believe they are going to selling Treasury Bonds to raise the funds.

The problem with just raising money out of nothing is, of course, massive inflation.

[Asher]

Re: Thue asks stupid basic economics questions

Originally posted by Thue
So I have a few questions:

Where will the $700 billion (at a time...) for the current bailout come from? Since the Federal Reserve issues money, can they not just say "*poof* - we now have $700 billion"?

By that line of though, why does the United state government have debt at all? If the US has a $400 billion deficit, then why not just magically have the fed create $400 billion in $100 notes, and pay with that?

Ask Germany from the mid-20th century why this is a bad idea.

[ColdPhoenix]

They can magic money up like that if they want. It causes inflation though and so reduces the value of the dollar in everyone's pocket.

It's kind of like an indiscriminate tax on everyone who holds/is paid in dollars. It's better to take it in tax as more of the funds can be paid by rich people instead of the poor. Also, if they keep just printing loads of extra money then foreign investors won't want to hold dollars as the value is going down, when they all sell the price will go down more.

That said, they'll probably just print it off as voters will probably be more p!ssed of by a massive tax hike. Or they might borrow it. Yeah, they'll probably borrow it from China.

[Ramo]

The Chinese central bank is still buying Treasury bonds. Actually T-bonds are pretty reasonable investments right now (if you're going to invest in the American economy). Recently, T-bonds were selling at a higher value than a dollar; pretty remarkably, investors figured that paying more than a dollar now to get a dollar in 30 days is better than putting their money anywhere else.

[Traianvs]

Originally posted by ColdPhoenix
They can magic money up like that if they want. It causes inflation though and so reduces the value of the dollar in everyone's pocket.

It's kind of like an indiscriminate tax on everyone who holds/is paid in dollars. It's better to take it in tax as more of the funds can be paid by rich people instead of the poor. Also, if they keep just printing loads of extra money then foreign investors won't want to hold dollars as the value is going down, when they all sell the price will go down more.

That said, they'll probably just print it off as voters will probably be more p!ssed of by a massive tax hike. Or they might borrow it. Yeah, they'll probably borrow it from China.

They have a huge debt already. It doesn't strike me as a sign of confidence if the US keeps loaning money from all around the world. The US have been living above their standard already for so long now.

And printing money and ergo inflation would screw the whole world along with the US citizens, and nobody'll want to use the dollar anymore after a while. It's funny to see this crisis happen right when there are elections near... It would be impossible to beef up taxes right now; it's not something you want to say when you want to get elected. But maybe there's a workaround, i dunno

[snoopy369]

How does an 'inflation tax' not also tax the rich more than the poor? The rich, after all, have more ... money ... than the poor, don't they?

[Thue]

But to what degree does the US print more money?

[ColdPhoenix]

Originally posted by snoopy369
How does an 'inflation tax' not also tax the rich more than the poor? The rich, after all, have more ... money ... than the poor, don't they?

That's true but it's more like a flat rate tax rather than progressive tax. Not sure what it's like in the US but in the UK people on low salaries pay very little income tax as the first few thousand you earn is tax free and the % of tax increases as you earn more. 'Inflation tax' would mean rich people 'paying' a lot more but everyone 'paying' the same percentage.

Fair point though.

[Thue]

And why should it be better that the government print a treasury security instead of printing a $100 bill?

Since it seems to me that treasury securities and $100 bills are more or less interchangeable, I don't see why one should be substantially better than the other.

[Kidlicious]

Originally posted by Thue
And why should it be better that the government print a treasury security instead of printing a $100 bill?

Since it seems to me that treasury securities and $100 bills are more or less interchangeable, I don't see why one should be substantially better than the other.

Cash is more inflationary than securities.

[Kidlicious]

Originally posted by snoopy369
How does an 'inflation tax' not also tax the rich more than the poor? The rich, after all, have more ... money ... than the poor, don't they?

The rich can buy gold and other non-dollar denominated assets. Poor people can't. They have to buy what they need to survive.

[Ecthy]

Re: Re: Thue asks stupid basic economics questions

Originally posted by Asher


Ask Germany from the mid-20th century why this is a bad idea.

Wrong time.

[Asher]

Re: Re: Re: Thue asks stupid basic economics questions

Originally posted by Ecthy


Wrong time.

The mid 1920s is still mid 20th century.