This just hit me.

If we have trillions of dollars wrapped up in these derivative, credit swap, funny money investment tools, and we don't know the actual value of that, isn't borrowing kind of silly?

Why not just have Uncle Sam print dollars. The trick though is to just not release them into the economy as dollars, but only release them in return for public works of value.

So then, the new money enters the system, and it's backed by the things people created to get some of it. We are not actually diluting existing dollars, because there is new value created for each and every new dollar introduced!!

We literally expand our worth, thus reducing the scope of the problem we have now! Think about it. That's what a ton of us (me included) have been saying anyway.

Instead of being in debt to somebody, we get paid back as soon as the works are done. Even better, we get the full return on those works as well because Uncle Sam owns them free and clear, for a double whammy!

The only people not going to be happy about this are those that are heavily invested in derivatives in the first place!

And with them, we don't know exactly what those things are worth, thus the dilemma we face right now. It's hard to start lending and moving dollars when one is not sure what their position is. So, let them sort that out on their own time and their own dollar.


I would put this to the test.

Don't borrow squat. Need money? Willing to work hard for it?

Come see Uncle Sam. He needs bridges, roads, broadband and a whole ton of other things! If something of value is realized for the dollars, those dollars are valid. There is NO dilution.

Inflation is checked to a large degree also. Why?

Because we are growing our worth, almost 1:1 with real dollars backed by real value! That's what the infrastructure is.

If we do this enough, we literally become more wealthy as a nation, and if we get wealthy enough, as in we built up enough NEW value to more than PAY BACK the old value, our troubles go away.

The only ones that lose are the big financials who are way over leveraged and don't know their own worth right now anyway. They are trying to get us to take on that burden for them, when the truth is, we don't have to!

If we just start working on things that have value, then businesses will establish around that work as well. If the program is aggressive, then it will rapidly become self-sustaining, just like it did last time!

In the end, the worth of all that funny money will be put to the test! The new works back the dollars introduced into the system.

So, what are all the existing over leveraged dollars worth?

They are worth all of the value there is -minus the new stuff, which is created with new dollars! The longer they wait to sort it out, and the more expensive they sell their money for, the less worth they will have.

So then the incentive for ordinary people is simple. Just go get your ass to work!

For the banks and investment companies, their incentive is to work hard at dealing with all their toxic assets, so they can demonstrate as much worth as they can, so they can invest those dollars into fresh, new, viable assets, or build competing ones. Doesn't matter.

Call it a tax on why financial regulations matter.

Printing dollars and using them to pay for public works projects...I'm not sure how that's really feasible, since most of these contractors aren't getting paid by suitcases full of cash but by wire transfers or big checks.

Still, if you paid for a public works project with money you just printed, how is that different than printing money and entering that into the economy some other way? Either way, you are simply increasing the money supply - which is generally an inflationary measure. I'm sure an economist could explain it better - but arbitrarily increasing the money supply by, say, $1Trillion is probably far worse for the economy (huge inflation) than borrowing it and adding to the national debt.

Well, I see it as different because the value of the nation is larger. And it's larger in proportion to the dollars printed. As a soverign nation, we get to print dollars according to our value. This is one of the things that nations do.

Maybe only do this for labor, not raw materials too. I can totally see where that breaks down.

If we spend a trillion, and we borrow say 250 billion for materials, and the rest is labor, don't we also largely have a trillion dollars of new wealth sitting around to back those dollars with?

I totally get why printing money, for nothing is inflationary. In that scenario, all existing money is diluted because the value traded with it does not change.

Done this way, the value traded would increase along with the money supply. The source of the value is simple labor.

And at the end of the day, that is what it always is. Everything we have, at some point boils down to labor over time, and that equals value.

Think of it this way.

I'm bob the farmer and I've got a farm and I've got debt. Maybe joe the son gambled it and owes it to kaminski the mobster.

If I borrow for that debt, I own less of the farm. And if I borrow it from kaminski, that's even worse!

So then seeing this debt, I borrow a very small amount for something, say seed. The amount borrowed is small in proportion to the debt, so as to not significantly increase risk.

If I then spend more time working that farm, to leverage that seed, that yields dollars, which then pays down the debt for the seed, and ideally kaminski.

Labor then, can directly produce value.

Why not do that? The bridge is publically owned. Why shouldn't it back public dollars?

And that's the crux of it. Printing new dollars, without some value change that coorisponds to them will trigger inflation.

However, if released along with new value, I don't see how that would be the case!

Don't borrow squat. Need money? Willing to work hard for it?

I'm 100% for that. For welfare recipients too. (Unless you have some physical affliction that prevents you from working)

Need a new bridge (as you mentioned above), put local companies to work building it using local people. Not some national company that will truck in workers.

...kaminski the mobster... Is that the Polish Mafia??

Missing,

The key as you basically point out is that money is not value unto itself...it just stores value. (We're talking fiat money, not silver or gold coins, which is something else).

In your example, when you borrow money, you are borrowing the value of what that money can buy - in this case, seed. The money borrowed is routed to the seed seller, and takes it's own path into the economy. Take that seed and add labor, and you have a product (the crop) that will have more value than the seed alone. But, you still need to repay the loan with interest. This is a profitable venture if seed+labor is worth more than loan+interest, and you can keep the difference. (and in your example, the 'profit' goes to pay down Kaminski).

In any case, printing money can only work if there is imminent increased value coming into the economy. I don't think the mere existence of dollars will necessarily prompt the creation of value. The government doesn't have to have a bunch of preprinted dollars at the ready, either; they can crank up the dollar machine pretty quickly. Plus, as has been pointed out, much value is now stored electronically. But, as we are finding out, the quality of the value storage device matters. A dollar bill is becoming a better storage device than a mutual fund account, for example.

If we paid for labor with printed dollars, wouldn't that value be recovered in the form of the completed work?

Materials would be essentially a loan, but labor isn't in that scenario. For a small time, there would be a bit more money in the system, and because of that a small dilution, but once the work is complete, those new dollars are paid back by the value of the work being greater than the raw materials.

So then, the sum of dollars in circulation grows, but so does the value traded with them.

If you print money and add it to the money supply, it doesn't matter whether you use it to pay workers or pay for materials. It still just increases the money supply. It all comes out in the wash.

Like, if my grandmother gives me $5 for my birthday and I spend $20 on things for myself: a baseball, a football, a movie ticket, and some popcorn. What did the $5 pay for? The baseball? The movie? The popcorn? Doesn't matter - the $5 increased the amount of money I had to spend to $20. Who cares what I say it is spent for?

Yes, and flip that around and pay labor directly from printed dollars, and you get the same kind of thing.

That's the part I've not yet found any solid counter point to just yet.

For materials, sure. Totally has to be a loan, because the materials are consumed, and are embodied in the finished work.

But labor does not have that property at all.

So then, Uncle Sam can pay labor directly, given the labor is being applied to something that has value.

If it all comes out in the wash, then what I just wrote works. For any given dollar, who cares how that dollar got generated right?

What we do care about is the number of dollars in circulation. Why do we care about that?

Because at some point, all the existing value statements we have are expressed in them.

If we add, say 10 percent more dollars, everybody sees their value diluted by that much, right.

On the other hand, if we add 10 percent more dollars, and there is suddenly 10 percent more value, then nobody is diluted.

That's the part I'm having a hard time sorting out!

$100 project that when complete will be worth $150

$20 materials == that's hard dollars, must be borrowed.

So we borrow them and the cost of those dollars over the life of the project is $30

That leaves $100 dollars that could potentially be paid in labor.

So we pay $50 more.

Total dollars into the system = total dollars + 50. There is $50 dollars of new value from the completed project as well.

Net dilution then is zero.

Dilution or augmentation only happens when the number of dollars changes, without the value traded by them changing.

That's the whole point of having the kind of fiat currency we have!

As a nation then, if we build value, we then can print currency! We simply did the work, know the value is there, and if we are right about it, nobody sees any change in their particular pile of dollars.

If we were to lie about it, then inflation happens, or deflation, whichever way the lie goes.

I think the simple answer is when you have 100 dollars, if you print 10 more dollars and add it to the pool of 100 dollars, you devalue the dollar. Now each dollar is only worth 91 cents because the extra cash dilutes the value.

I think you can look at Germany in the 1920s for a reason not to print money.

Ok so let's say the pool of dollars is 100.

That's it.

What does that 100 dollars represent?

It represents all the value statements! Somewhere, there is 100 dollars worth of things, as in somebody, if they had all the dollars, would own those things.

All of our dollars that are out there are only as good as what they can purchase, right?

And that's the core objection to printing money.

Print 10 more dollars, and their worth goes down why?

Because there isn't 110 dollars of worth out there.

However, if there was 110 dollars of worth out there, then nobody would be diluted.

So then, if we build stuff that's worth more than the raw materials, doesn't that then add to the worth of the nation? The full faith and credit of the United States is that much fuller?

How else did we get to so many dollars today?

As people or businesses we can't print money. Governments can.

Now, as a person, let's say you worked on something, and suddenly you have it, and it's worth a lot!

Didn't you just print your own money as soon as it's sold?

Of course you did. That's converting labor into value. Happens every single day.

So then, Uncle Sam can convert that labor directly into value because for Uncle Sam money doesn't cost anything but faith and trust.

If those are not violated, as in the additional money actually represents additional value, where is the harm? That's what I don't get.

Germany printed money, but DIDN'T actually add value. Many nations have done that, and it's bad. Everybody finds out, faith and credit are lost and the currency becomes worthless because there is too much of it.

BTW: We are in the state we are in, because people think that money can simply be leveraged into more money. That's actually bogus, and we are living that crap. Risk is what corrects it.

And I'm hearing you guys. This is an interesting topic to me. I don't know a reason why Uncle Sam can't convert labor into value directly, given that labor realizes something of actual measurable and marketable value.

Ed Says: "printing money can only work if there is imminent increased value coming into the economy. "

Exactly! If we borrow for materials, we pay that back with interest as we denied somebody the use of some value they own. Fair enough.

If we pay labor directly, that's comp for denying somebody the use of their time and energy for their own purposes.

Say the finished marketable work value is greater than the total cost of the materials, plus the money paid out for labor. How then is the money supply diluted?

The laborers spend their dollars at Bob's general store. He collects them all, buys the work, and the rest of the value and currency that expresses it remains unchanged!

Print 10 more dollars, and their worth goes down why?

Because the value of what the total amount of currency in circulation represents hasn't changed.

If the total value of the US economy - assets, raw materials, etc. - is X, then we can call the dollar a fraction of X. Say there are 1,000 dollars in circulation. Then each dollar is 1/1000 of X.

If I double the number of dollars in circulation to 2,000 but X (total value) remains constant, then each dollar is now 1/2000 of X. Worth half as much.

yes. of course.

What if it represents 10 dollars more?

Doesn't that 10 collars come from labor?

If so, borrowing to pay it is a scam that enriches the bankers for doing NOTHING. If we pay labor directly, then they do get enriched, but not directly as a mark up on OUR labor.

Readers Question from Economicshelp.org:

One way to finance government spending is to print money, but printing more money leads to inflation. How economic theory justify this?

Ceteris Paribus, if Money Supply increases faster than real output then inflation will occur. The Quantity Theory of Money seeks to establish this connection with the formula MV=PY. Where

M= Money supply,
V= Velocity of circulation (how many times money changes hands)
P= Price level
Y= National Income (T = number of transactions)
Rather than delving deep into the quantity theory of money. Let’s think about a simple example.

Suppose the economy produces a 1,000 units of output.
Suppose the money supply (number of notes and coins) = £10,000
This means that the average price of the output produced will be £10 (10,000/1000)
Suppose then that the government print an extra £5,000 notes creating a total money supply of £15,000; but, the output of the economy stays at 1,000 units. Effectively, people have more cash, but, the number of goods is the same. Because people have more cash, they are willing to spend more to buy the goods in the economy.

The price of the 1,000 units will increase to £15 (15,000/1000). The price has increased, but, the quantity of output stays the same. People are not better off, and the value of money has decreased; e.g. A £10 note buys less goods than previously.

Therefore, if the money supply is increased, but, output stays the same, everything will just become more expensive. The increase in national income will be purely monetary (nominal)

If output increased by 5%. and the money supply increases by 7%. Then inflation will be roughly 2%.

This is a simplification. For example, in the real world it is hard to measure the money supply (there are many different measures from M0 narrow money to M4 wide money)

However, it provides a rough explanation why printing money reduces the value of money causing prices to increase

Thanks for that one and for entertaining me. LOL!!

That tells me how to take a guess at value, and it confirms that value and money are related in the way I wrote above.

Number of transactions is new. Don't yet know what that means in the scheme of things.

The scary thing is that simple bit supports what I just wrote about the payment of labor. If, in fact the work product is worth more than the work and the materials, or even if it's exactly equal, then the money supply wouldn't be devalued as a whole.

In fact, it explains why there are a ton of dollars out there now. Labor over time baby!

Why pay for labor with expensive dollars then? All it really does is deliver a fraction of our value to those wealthy people holding lots of dollars, for essentially doing nothing!

And aren't these the clowns that don't even know what their current value freaking IS?

Of course the only reason people pay for things with expensive dollars is because they don't have any!

Like the government, people can apply labor to materials, sell that and obtain far cheaper dollars, JUST LIKE THE GOVERNMENT CAN. The difference is Uncle Sam is in charge of the value statement represented by the currency.

A direct printing to compensate for value realized through labor, does not violate the currency.

Why borrow then, if you are the government?

I still don't have an answer. Damn...

The answer is inflation.

Yeah?

I'm there, but for the addition of value labor causes! If we were to pay for labor and the result of it was not an asset worth enough, sure! There would be inflation because the pool of value would be less than the resulting pool of money.

If, on the other hand, the labor results in a work that is worth more than the delta on the pool of money, there is no inflation.

Taking the census is an example of the former. Building a bridge is very likely an example of the latter.

That's the bit that does not add up for me. Ignoring that means that either there is a factor not discussed here, or there is a very significant accumulation of liquid value somewhere that's being built on the public dime. (interest on that which is not borrowed; namely, labor)

Humor me! Work a little for it. Lord knows I have in the past.

I'm not there yet

Inflation is WHY we borrow. I get that. We do it because materials and such need to be purchased and there is a value transfer that must happen for that and the government is no different in this regard.

I get that too. Materials are gone, once something is made. The borrowing and value transfer must occur to account for that.

When somebody works, they don't have the use of their time. That time is spent regardless of whether or not they were paid for it.

If that somebody applies their labor to their own ends they don't borrow for that. Why then should the government?

WE are the freaking government! If we can show the value, we then should be paid directly for improving the public commons.

Where the answer is no additional value, or value less than the money released, I'm there. Inflation is gonna happen.

However, it does not have to happen, if the work is structured in ways that do add that value.

And that's the core of the thread. Why are we not doing that then?

Is it not possible?

If not, how? Seriously!

Charts of deficit spending in constant dollars and as a percentage of GDP: http://traxel.com/deficit/

Chart of inflation rate per year: http://www.gocurrency.com/articles/stories-inflation.htm

or here: http://en.wikipedia.org/wiki/File:US_Historical_Inflation.svg

Money in circulation: http://en.wikipedia.org/wiki/Money_supply#United_States

Is the question; Which would have more of an effect on our economy - Inflation from printing money? Or borrowing the cash?

Not really.

The question is, for a project work where the result of the completed work is more than, or equal to the dollars paid out for labor, and the dollars paid out for materials, why do we have to borrow the labor dollars?

The government regulates it's money supply, supposedly keeping it in line with all the value that is out there. If the value is increased, and the money is increased in proportion, then there is no inflation.

So then, borrowing to pay labor costs on the kinds of projects I just indicated isn't needed.

(or if it is, why?)

Bridge is worth $1000 complete.

Materials are $200, labor is $400, total 600 to build.

If we built the bridge, printing $400 along the way during construction and paid it directly from the government to the workers, while paying for materials with $200 borrowed dollars, how can inflation happen, given the bridge is really worth the $1000?

If the dollars are added up, there is actually $400 dollars of value added to the system, despite the fact we printed up $400 for labor!

The other observation then is that if we do, in fact borrow to pay labor, isn't that double dipping on that labor?

When we choose to do some labor, we don't borrow to do it. We just do it! We do borrow for materials though.

So how is it different when the government does this?

This is really bugging me.

I made a joke here about how this seems like a ripe opportunity for someone to try to sell MK a bridge.

But seriously, the money supply is regularly and carefully adjusted to fit the size of the growing economy. I.e., it's already being done.

Beyond that, money has to be removed from circulation (not always by taxation; recall War Bonds) to balance government spending. Otherwise, inflation via currency devaluation--the unfairest, most damaging form of taxation--will occur.

While I've been hoping for a big, big stimulus (bigger than we've seen yet) to drop-kick the economy, I also realize that deep deficit spending can't perpetuate very long. Those over 50 will recall how Vietnam ate the Great Society.

Remember the wage and price controls we endured came even before the OPEC embargo. Over a decade of stagflation followed.

LOL!!

That would have been perfect.

What's bothering me is I understand deficit spending and it's impact. Also understand how the money supply needs to be adjusted.

It's not at all clear why Uncle Sam has to borrow to pay labor.

This reminds me of the bizarre discussion I had with a buddy who felt he needed to add more antifreeze to his radiator because of the wind chill factor, insisting I help him figure out how much he should buy.

(Needless to say, I suppose, this was in the mid-70s when the WCF was new, and that my buddy was an ex-Marine.)

Missing, Forget Gary Locke, Let the president know you need to be Commerce SEcretary!

See, maybe we need fewer politicians in the system recycling their ideas and more real solutions from real people FOR real people!

Great thoughts!

Well, for the record, nobody has answered that question. I asked a lot of people I know.

Several have pointed out that if the labor is not attached to a work of value, then inflation would occur.

And that's true enough, as the money supply would have changed while the value it represents would not.

And there it sits. Idle musings from some guy on the internet.

-->I don't think this question is as bad as the wind chill deal...

LOL!!

With me, I do ask the ones that nag at me though. Stupid or not. If you are asking, it's absolutely not known stupid! Only one way to find out!

It's even better when you can corner a politician live with these types of questions.... Like in the driveway during campaigning..... One made the mistake of turning a question back on me then paid the price when I went into detail with MY SOLUTION. At the end he said "maybe you should run" and left.

It's surprisingly hard to explain the "obvious," and such questions force me to concede that my understanding of the bigger issues is to a large extent an acceptance of explanations by people I trust.

I mentioned the cost of Vietnam above in contrast to the programs of the Great Society but neglected to observe that dollars spent overseas are more inflationary than those spent domestically.

I just Googled up the cost of the Iraq War and was dismayed to see it has surpassed the cost of Vietnam in adjusted dollars, around $600 billion so far and expected to top over a trillion overall. That makes my memory of how long it took to dig out from the 70s even more bleak.

(I recall how when Packwood was running for his first term, he observed that we could buy all the real estate in Vietnam for what we were spending to fight over there.)

Yeah, that is depressing.

It's also worth noting that we've a lot of good innovations that come from somebody just asking for that explanation. Sometimes we find it's just an assumption, or an expectation set, more than it is something solid.

One of my favorites is, "It is not productive to ask that question." LOL!! Could it be the answer to it is ugly, inconsistent, or leads down a path that invalidates something else that is important?

Usually, it's one of those. Sometimes it's just an artifact of something that really isn't productive.

When these kinds of things occur, it's not always "obvious".

The closest I can come to on this is a great many people gloss the case I've highlighted over out of fear of devaluation, or expectation that "that's just how it's done", which is more of a matter of politics and influence than it is truth, or some proof.

And those are perfectly acceptable answers! Those could be exactly WHY we are borrowing Stimulus money for the labor case I've identified here.

Doesn't mean it's set in stone though, or that it's the KNOWN right thing to do. It's just the thing we EXPECT to do.

You would be surprised at the learning that can occur when you play the "pretend I'm an alien from Mars" game. It's fun. Played it many times. Know some really potent stuff because of it.

This one is on the KSKD watch list. I don't know enough to express the question better. Wish I did.

No matter though. Somebody will express it in a way that is familiar to me. I can reconcile that with the other stuff I know, or not. (and that's always interesting)

Or, it really is a matter of politics and or influence. That will slip too.

I've a whole pile of these. Some have taken YEARS. So that's it. Filed, until some future date when something, some where connects.

On "people we trust".

That's a good question! I'm gonna somewhat trash my thread, largely because I don't believe an answer is here at this time. So then...

Do we trust the kinds of people that could answer this question, given the things we've experienced in recent times? (not to mention what's coming!)

That's another solid question, IMHO! Frankly, when something "obvious" is difficult to explain, as I mentioned above, politics and influence has a lot to do with that complexity.

This is not to say that's some evil, bad thing. It all might be perfectly reasonable. And if it is, then there is some also reasonable expectation of being able to be directed to a detail of that, to justify "it is how it is".

On the other hand, perhaps that trust isn't warranted! After all, if any of us are actually asking a question of this kind, isn't that a de-facto admission of HAVING to be in such a position of trust in the first place?

Damn right it is.

And that's exactly why I'll file something like this and just sit. The trade-off is a somewhat busy mind, but then again, it has paid off too. To each their own, and maybe this is just some long winded way of communicating why I am the way I am.

When in a forced position of trust, the WHY behind that has always been important to me. Call it American. I sure do. When I was a kid in primary school, I heard lots of lectures about how our nation was formed and the WHY's behind that came from great thinkers, who dared to just ask those questions and question the obvious.

Hamilton, Madison, Jay, and others too: Paine, Franklin... I can list many others.

Where there is politics and influence, there also lies power and wealth, and those things are suspect by their nature. That's American too.

And that circles down to trust. Most of the time it makes sense. Sometimes it doesn't and sorting that out is a tough call, meaning we just have to ask the questions we ask sometimes.

The answer:

We have a debt based system. Banks literally create money when loans are granted to pay for works and materials.

This is a check on the system, with the debt insuring value is accounted for, with the balance realized as risk, where money evaporates and somebody somewhere suffers a loss.

Frankly, this does mean Uncle Sam could pay labor directly, but then would be accountable for the end product of said labor and the value assessment of that would be arbitrary. This is the Zimbabwe dilemma. If done just and true, nobody would be harmed. The fear is that it wouldn't be just and true.

We are Americans, we do like checks and balances, so that's how it works, and it works that way by mutual agreement for the greater good. Violating that would be a travesty of much of our founding values.

Since value is relative, we really have no metric, other than debt to account for the creation and trade of it.

So, there you go.

(that took a while --sheesh! It was a combination of my reading and a "slip" from Thom Hartman, who explained how money actually is created.)

The Fed released $1.15 trillion yesterday, using $300 billion of it to buy Treasuries.

As long as there are works of value attached to that, the debt will be retired and we have few worries.

My fear is that we are creating that debt, putting it directly into the failed financial system, no value is created, and we all suffer a tax.

Socialized losses. Not cool at all.

If we have a value problem, we need to be working that off, not just printing it off. Cuts both ways here.

It's just that up above I explained why we couldn't simply print the stimulus money, and then the Fed decided to print a bunch.

I'm not saying that's a bad thing--I figured some money creation would be a necessary component of the approaches to the crisis--but the size of this is worrisome, as it's effectively a devaluation of the dollar.

I'm struggling to understand what's happening. Trillions are mentally unfathomable by me, so I keep track by looking for descriptions of amounts in relation to GDP, and try to keep in my head various things like the size of GDP and the federal budget in round trillions (14 and 3, respectively, if I have 'em right).

Graphs like these are helpful to me: http://upload.wikimedia.org/wikipedia/en/9/90/Revenue_and_Expense_to_GDP_Chart_1 993_-_2008.png
http://z.about.com/d/uspolitics/1/0/n/G/095.png

It's ugly.

Pulling an end run on the system, by paying some labor directly seems minor league now doesn't it?

I like the graph. We probably need a lot more of them.

Oh yeah, "suffering a tax" is an understatement too. I didn't highlight that in my post above, but a devaluation or dilution of the currency taxes EVERYBODY and EVERYTHING. Secure savings? Taxed. Income? Double taxed!