{"id":3718,"date":"2011-08-21T14:40:49","date_gmt":"2011-08-21T18:40:49","guid":{"rendered":"http:\/\/timscogitorium.com\/tinblog\/?p=3718"},"modified":"2011-08-21T14:40:49","modified_gmt":"2011-08-21T18:40:49","slug":"printing-money-is-not-as-crazy-as-it-may-sound","status":"publish","type":"post","link":"https:\/\/timscogitorium.com\/tinblog\/2011\/08\/printing-money-is-not-as-crazy-as-it-may-sound.html","title":{"rendered":"Printing money is not as crazy as it may sound"},"content":{"rendered":"

\"Macroeconomics\"<\/a>I am not an economist.\u00a0 However, for reasons I dare not delve into too deeply, my lady<\/a> finds discussions of economics a turn-on.\u00a0 The downside is that now I not only have to compete with George Clooney and Toby Keith, but also with the likes of Ezra Klein and Brad DeLong.\u00a0 If one of them ever develops tech skills, I’m toast.\u00a0 In the meantime, “Get in line boys.”<\/p>\n

As I’ve written in this space before, one of the damnable things about macroeconomics is that it is so blastedly non-intuitive.\u00a0 Most of us are schooled or experienced in microeconomics (open systems), whether that be managing a household budget or running a business.\u00a0 Macro, or closed systems like the U.S. economy, work on a very different set of rules and have a very different set of control levers to work with.\u00a0 It’s abstruse stuff, and my hope is that maybe I can do a bit of the heavy lifting here, so some elements of macroeconomics make a little more sense.<\/p>\n

Presidential hopeful Rick Perry made headlines this week for his statement that if the Fed decides to print more money, it should be seen as a treasonous act<\/a>. Perry’s not alone here.\u00a0 While most politicians are distancing themselves from claiming it’s treasonous, many are advocating that the Fed should not take further actions like “Quantitative Easing” to increase the money supply.<\/p>\n

So what does all that mean?\u00a0 Printing money out of thin air sure sounds like a dumb solution<\/a>.\u00a0 Doesn’t that just make my hard-earned money worth less? How would that help the economy?\u00a0 These are all reasonable questions.\u00a0 Questions which I’ve been struggling to get my own non-economist head around by reading what actual economists are saying.\u00a0 The trouble is, folks like Matt Yglesias and Scott Sumner<\/a> often write for an audience of fellow economic geeks.\u00a0 And it’s often damn hard to wade through the jargon to figure out the underlying principles at work.\u00a0 But I think I have a handle on it, and want to share my translation and understanding.<\/p>\n

First, “printing money” is a euphemism.\u00a0 No actual currency gets produced.\u00a0 Rather, the Federal Reserve has a number of levers by which it can alter the supply of money.\u00a0 Think of the U.S economy as the proverbial pie.\u00a0 Each slice of pie represents a unit of money, like a dollar.\u00a0 Increasing the money supply doesn’t change the size of the pie, but it does change the size of the dollar (slice).\u00a0 If you carve the pie into more slices, then each slice has less in it.\u00a0 “Quantitative Easing” is one of the levers<\/a> the Fed can use to increase the size of the money supply.\u00a0 And yes, the effect of this is to lessen the value of the dollar.<\/p>\n

A weaker dollar seems like a bad thing.\u00a0 It offends the American sensibilities to think of anything about us as weak.\u00a0 But in cold economic terms, there are pluses and minuses to a devalued dollar.\u00a0 A weak dollar doesn’t translate to a weak economy.\u00a0 In fact, in our present situation, it could translate to a stronger one.\u00a0 But first, a word about… inflation.<\/p>\n

Another term for devaluation is inflation, a word that also sounds bad.\u00a0 Inflation is especially troubling to those of us that lived through the 70’s and early 80’s<\/a> where double-digit inflation was rampant.\u00a0 We also saw the economic collapse of Argentina, Zimbabwe, and other countries because of hyperinflation. \u00a0 But we need to remember that inflation is a lot like oxygen.\u00a0 Too little can be just as deadly as too much.\u00a0 Japan’s “lost decade”<\/a> of the 1990’s was a period marked by very low inflation, economic recession, low productivity, and high unemployment.\u00a0 Sound familiar?<\/p>\n

Inflation in America has been at historic lows<\/a> for the last couple of years.\u00a0 The key is to find the sweet spot of around 3% and hold that.\u00a0 In many respects, this is what the Fed’s job is.\u00a0 It tries to maintain that small positive healthy inflation rate.\u00a0 It’s a balancing act.\u00a0 And an over-correction could send inflation spiraling in either direction.\u00a0 This is primarily what conservative fear at the moment.\u00a0 That an attempt to nudge inflation up will start a cascade reaction that will send us back to the 70’s.\u00a0 No one wants that.\u00a0 (Unless you’re invested long in polyester and hairspray commodities.)<\/p>\n

But why is some inflation good, and why would a little extra be good right now?<\/p>\n

In terms of the flow of money in an economy, the net effects of inflation in absolute dollars are a rise in the cost of goods, a rise in the cost of labor (wages), and a rise in value of assets (homes, stocks).\u00a0 Granted, these don’t always rise uniformly.\u00a0 Prices tend to rise ahead of wages, causing short term pain.\u00a0 But wages do follow suit, eventually making the inflation kind of a wash.\u00a0 Remember back in the early 80’s when getting a 10-15% annual raise was common?<\/p>\n

What doesn’t change in a good way with inflation is cash.\u00a0 In other words, if you’re sitting on a lot of liquid assets, those assets become worth less.\u00a0\u00a0 Who’s sitting on cash?\u00a0 Well, big corporations are sitting on over a $1 trillion<\/a>, and of course banks have a lot of fixed cash assets, not the least of which are all the mortgages out there.\u00a0 If you’ve loaned out $100k at 4% for 30 years and inflation suddenly hits 5%, you’re losing money.<\/p>\n

On the flip side, inflation would be great for consumers who are currently sitting on near record household debt<\/a>.\u00a0 As an example, many people are currently underwater on their mortgages.\u00a0 Let’s say you owe $200k on a $175k house.\u00a0 Inflation doesn’t change the amount you owe, but it does increase the value of the property.\u00a0 So now you’re not underwater anymore.\u00a0 Further, if you have a low-interest home loan, a higher inflation rate suddenly makes that nearly free money.\u00a0 It doesn’t decrease your absolute debt, but it does decrease your relative debt, especially as your wages start to rise.<\/p>\n

Finally, inflation also punishes people who are sitting on cash.\u00a0 As almost everyone has said since the economy went south in 2008, we need cash to flow to stimulate the economy.\u00a0 Think of money like the blood of the economy.\u00a0 To the body as a whole, it’s less important exactly how much blood you have, than that the blood you have is circulating vigorously through your system.\u00a0 The U.S. has an ample blood supply, but it’s currently pooled.\u00a0 We need to get it pumping, and inflation helps that.<\/p>\n

There are also advantages to America relative to the world.\u00a0 A weaker dollar makes our goods cheaper to sell to other countries, and imported goods more expensive here.\u00a0 This is an immediate boon to exporting companies.\u00a0 However, given that we import a ridiculous portion of the goods bought in this country, it will drive the cost of those goods higher.\u00a0 The good news is that there will be less incentive to design, manufacture, and service goods overseas, and that would mean more jobs for Americans as jobs start to come back onshore.\u00a0 But again, that’s a short term pain for long term gain bargain.<\/p>\n

Hopefully by now, you’re starting to think that maybe this whole printing money thing doesn’t sound quite so treasonous. Maybe you’re thinking it’s even worth a shot, or at least that it’s a perfectly reasonable tool to use.\u00a0 Ironically, Rick Perry himself believes it will have a positive effect on the economy.<\/p>\n

Perry said<\/a> the central bank’s leader would be committing a “treasonous” act if he decided to “print more money to boost the economy.” Such action, the governor told a crowd in Iowa, would amount to a political maneuver aimed at helping Obama win re-election.<\/em><\/p><\/blockquote>\n

Perry is explicitly saying that increasing the money supply would boost the economy.\u00a0 What he finds treasonous is only that he knows a better economy would help re-elect Obama.\u00a0 All of which brings us to why increasing the money supply is politically unpopular.<\/p>\n