(09-16-2012, 06:48 PM)Taem Wrote: Is it within a countries right to print money without any tangible value behind it if that money is parf of the world economy? For example, the US dollar used to based off the Gold Standard, then the Oil Standard - limiting funds to a real world, tangible goods. Now it's based off of notes if I'm not mistaken, which is essentially interest off the American dollar. But I'm loosing focus; I constantly read about countries needing to deflate their market, so they print several million/billion (or in Japans case, trillions) of dollars and inject the cash into the systems banks. Where does this money come from? How is it worth anything when countries can print as much as they want and it's value isn't based on anything tangible? The more I've been thinking about it and the light internet research I've done lead me to believe there is more printed money in this world than there is hard economic goods or labor/interest.
Careful. There is no amount of money that "represents" a certain value of goods or labour. Only a ratio between the two. It is impossible to have the "right" amount of money in circulation. There is no "right" amount - but every time you change it, it redistributes wealth.
Money is both a stock (the monetary base) and a velocity, The net monetary flow, which is what affects prices, is based on multiplying the one by the other.
The economic expression of this is MV = PY. That is to say, (Money stock)*(Velocity of money) = (Price level)*(Output). Now, most economists believe that long-run output is determined entirely on the supply side, that is, fixed by other factors like technology and capital accumulation. You can't make more stuff by printing more money. And, as we can see from the equation, this makes sense - if Output is held constant, the ONLY variable that can be affected by an increase in money stock or velocity is prices. If you printed money, the only thing that changes is distribution - you're giving that money to someone, and taking it from everyone else in proportion to their monetary wealth.
Where economists disagree is about the short run. Keynesians, both new and old, will tell you that the economy is only ever approximately at the supply-side limit of output, the most we can make with what we have. Usually, there is at least some spare capacity. Machines can be run longer, workers worked harder, more marginal workers employed, and so on. There is some short-term flex there, even if the long run is fixed, meaning that increasing either monetary stock or velocity can "heat up" the economy.
More importantly, if the monetary stock or velocity were ever to fall dramatically, if prices remained "sticky," we could see an actual loss in output. Factories would idle, and so would workers. In this situation, since prices don't change very fast, output itself can be increased by printing money. Price stickiness is controversial, but the basic explanation is that workers are *very* resistant to downward changes in wages, and therefore, it's more acceptable to fire people (or not hire them) than reduce wages, and that keeps other prices up.
The new Kenyesians will tell you that this is exactly where we are today. Ben Bernanke agrees, which is why interest rates at the Fed are practically zero - they're "printing money" as fast as they can without doing it literally. (They "print money" by increasing the volume of credit, not by making sheets and sheets of cash. But the effect is about the same.) The other interesting thing is, if you increase output rather than prices, it doesn't actually tax existing wealth holders. Their command over goods only decreases if prices increase, so as long as there is a demand-driven recession, "printing money" is not inflationary. That changes if and when the economy gets back up to full output, or when factories rust and worker skills deteriorate to the point where "full output" drops.
I believe the velocity of money dropped way, way down post-2008. Why? Deleveraging. While velocity is basically impossible to measure directly, it stands to reason that money sitting in peoples' mattresses, or in a savings account, or locked into long-term, safe T-bills, is not circulating as fast as short-term notes or credits during a boom. That drop in velocity has almost completely offset the increase in money stock, leading to very little price increase (we see shockingly low inflation) and a substantial output drop (the recession). That's why Bernanke is trying unconventional methods to get more money out into the economy.
He should just helicopter drop. Print some notes, and give them to people in briefcases. I suggest poor and middle-income people. The rich have gotten enough.
/endwalloftext
-Jester