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Mon Dec 3, 2012, 05:25 PM

dumb question about printing money in the us

I don't know if my education is severely lacking in certain areas, or if I'm just always thinking outside the box, but here is yet another query that I've never learned an answer to.
It was in a high school history class (back a few thousand years to the 1970s) that I first read about governments printing more money, and how that leads to hyperinflation. I understand that part. But if mints are physically printing more dollars, how do those actual dollars (the pieces of green paper) get to the individuals to spend? Is the money sent to banks, which then are able to give more loans? Does everyone across the board get raises in their paychecks? Or is there some procedure that I just never learned about in school?

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Reply dumb question about printing money in the us (Original post)
skippercollector Dec 2012 OP
notadmblnd Dec 2012 #1
thelordofhell Dec 2012 #2
1StrongBlackMan Dec 2012 #3
FarCenter Dec 2012 #4
bluedigger Dec 2012 #5
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Prometheus_unbound Dec 2012 #6
DanTex Dec 2012 #7

Response to skippercollector (Original post)

Mon Dec 3, 2012, 05:30 PM

1. yes it is sent to banks

When I worked at the branch level back in the 70's, the banks would get books of new money. I think there were 25 new bills in a book. The books looked much like a check book.

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Response to skippercollector (Original post)

Mon Dec 3, 2012, 05:34 PM

2. Here ya go..........

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Response to skippercollector (Original post)

Mon Dec 3, 2012, 05:35 PM

3. I strongly suspect ...

that if this "government printing money=hyper-inflation" narrative spreads wide enough, some of the previously financially illiterate will discover that "money" is illusory.

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Response to skippercollector (Original post)

Mon Dec 3, 2012, 05:43 PM

4. US Treasury Bureau of Printing and Engraving produces the paper money

http://www.moneyfactory.gov/uscurrency/theproductionprocess.html

It is then sold to the Federal Reserve Bank which then sells it to commercial banks.

Coins are produced by the mint.

Currency and coins are a small percentage of the money supply. Most money is held in various types of accounts at financial institutions, e.g. in checking or savings accounts.

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Response to skippercollector (Original post)

Mon Dec 3, 2012, 05:47 PM

5. There's "money" and there's "cash".

Physical money, or cash, is shipped to banks in the federal reserve system from the mints as needed. Old bills that need to be retired are returned and disposed of, as well. They only have a rough (well, pretty good) idea of the true amount in circulation, but respond to demand from the banks.

The money supply is expanded through the use of loans to banks at discounted rates. The banks then "create" money by loaning it out at a profit. In theory, as long as the population continues to expand, it works. It's the job of the Treasury to match the expansion of the supply to the demand, and it uses this power to either stimulate or create drag on the economy by setting the interest rate. I think that's "the Prime".

Dumb answer, but somebody smart will come along to correct me.

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Response to skippercollector (Original post)

Mon Dec 3, 2012, 05:48 PM

6. .

The central bank either loans the money to other banks, sells dollars to buy other currencies, or loans the money to the government.
There are many ways in which the central bank may avoid a price increase despite the new money. The main way works like this:
banks, normally, can loan their money many times over (i.e.: only keep a small reserve of cash). Exactly how many times over is set by the central bank. If the central bank loans the money but raises the cash requirements for lesser banks at the same time, it is in effect forcing them to make themselves safer, while lending them the money to do so. This will not translate into higher prices because the money is not circulating in the economy, but merely sitting in a bank vault.

Secondly, prices don't change magically. In order to have inflation (except for price increases due to more expensive imports, such as oil), there has to be an excess of demand, or alternatively firms need to react to higher wages by increasing their prices. Wages increase when the bargaining power of workers is high, that is, when unemployment is low and workers can find other offers easily.
We are not having those conditions right now. The "neutral" (i.e.: does not change the rate of inflation) level of unemployment is generally estimated at 5-6% for the U.S.A., even though for some time in the 1990s cheap oil allowed us to pretend we could have lower unemployment for long periods. NOTE: in a profit based, free market economy where workers can contract their wages, sooner or later unemployment will always exist. Without unemployment, workers would be able to demand higher wages, and this would ruin the "profit" part. Firms react by either firing workers or raising prices. Since workers are not idiots and would eventually demand even faster wage increases to keep up with inflation, firms would have to raise prices not just fast, but faster and faster, i.e.: worsening inflation.

Finally: I mentioned how the money lent by the central bank gets lent again many times over. This means that the "base" money (i.e.: more or less the money physically existing, though definitions can vary) is only a tiny fraction of the gross domestic product. in most advanced economies, including the U.S., it is around 10% of the gdp. This means that if we printed money worth 1% of the gdp, then, all else equal, prices would increase by 1%/(10%) = 10% --> too much. Financing even small deficits by printing money can lead to very high inflation really quickly.

Hope I helped.

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Response to skippercollector (Original post)

Mon Dec 3, 2012, 05:59 PM

7. The basic answer is that they use the newly printed money to buy Treasury Bills on the open market.

That increases the amount of money in circulation.

Although "printing money" doesn't usually refer to actually printing out pieces of paper. It refers to expanding the monetary base, which consists of physical cash along with reserves that banks have on deposit with the federal reserve. For the most part, the money just gets printed electronically, in the form of increased reserve deposits -- essentially the fed goes into a computer and types in a bigger number, thus creating more money.

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