Better than QE ? (All GOVs do it)

[Temperament]

ELECTRIC COLUMNISTS
Dr Money
Creating something from nothing
How governments boost economies in tough times
By Larry Haverkamp

June 09, 2009

(i happen to come across it one more time).




DID you know that governments can create money from nothing? It is almost like creating matter from a vacuum and happens all the time.

TEXT/ILLUSTRATION: LARRY HAVERKAMP AND MAROO
It works like this: Suppose George finds an old brick, paints it gold and convinces his bank to accept it as a $1,000 deposit.
The bank retains 10 per cent ($100) and loans $900 to Pete who uses it to buy a flat-screen TV from Carolyn Cable.
She deposits the $900 in her bank which again holds back 10 per cent ($90) and lends out the rest ($810).
This continues until the new loans decline to $0. I added them up and it totals $10,000. (Trust me.)
Incredibly, George's gold brick was phoney but it managed to create $10,000 in real money.
Economists call it 'printing money' and governments do it too. The only difference is that instead of a phoney gold brick, central banks write a $1,000 cheque backed by money it doesn't have.
Commercial banks are in on the scheme and agree not to cash the central bank's cheque, but to treat it like real money and lend it out immediately. The loans create $10,000 of new money in the process I've described above.
Central banks, especially in the US, have been doing this at a record pace recently.
In recessions - like now - it works well. It's free money, makes people feel richer and helps pull an economy out of its slump.
The only worry is inflation, but that's unlikely. If prices rise too fast, central banks can shrink the money supply by doing this same process in reverse.
Spend more to make more
An equally popular device is for countries to spend their way out of recession.
When you and I spend, we become poorer. But a country can spend, say, $1 billion for a bridge and generate new wealth that exceeds the cost of the bridge.
Does it mean the country gets a free bridge simply by spending the money to buy it? Incredibly, yes.
It is called 'stimulus spending' and is effective in boosting self-contained economies like the US, China and India.
Unfortunately, it doesn't work well for small open economies like ours. Most of our spending - about 60 per cent - flows out of the country to pay for the imports we need to survive.
________________________________________
An easy way to rid debts
LET'S say George visits from America and passes an art gallery in Ang Mo Kio.
He spots a lovely painting of a naked girl and asks the owner, Terrance, 'Is this pornography or art?'
Terrance says it's art so George whips out a $1,000 note as a deposit.
When George leaves the store, Terrance grabs the money and runs over to settle a $1,000 debt he owes to his daughter's tuition teacher, Ms Tay.
Ms Tay has a gambling problem and gives the $1,000 to her brother, Desmond, to repay money she had borrowed to play 4-D.
Desmond says, 'Thanks Sis' and uses the money to pay Calvin at Cool Computers where he had purchased a notebook on credit.
Calvin uses the $1,000 to pay Eric Wong for fixing his car six months ago.
Eric is a full-time mechanic and part-time art lover. He takes the $1,000 to his art dealer, Terrance, where this story began. He pays the final instalment on a picture he bought last year.
The next day, George shows up with his wife and - too bad - she won't have that naked girl in her house. Terrance has no choice but to refund George's $1,000 deposit.
Think about it. George left a $1,000 deposit and took it back the next day.
No income or profit was generated. Somehow, however, it has caused $5,000 of debts of five people to be repaid. All can now look optimistically toward a debt-free future.
Is this a solution to the world's financial crisis? Can we do the same to eliminate a few trillion dollars of worldwide debts?
It's food for thought.

[freedom]

Printing money itself is not bad because money is often required to be printed, otherwise, the economy will lack of enough money to function, e.g., the financial crisis in '08 - '09 or any economy/technology leaps.

The important thing is if or when you over-print money, you have a way to withdraw all new liquidity created.

So for the criticizers of QE3, the Fed is still in control(you don't see runaway inflation in US). Is it possible that the liquidity is out of the Fed's control? It is possible, but highly unlikely. The economy growth in US is too small to spark any meaningful inflation.

If that's so, why don't the Fed just implement QE infinity? The more liquidity the Fed injects into the economy, the more difficult for the Fed to withdraw the liquidity. The Fed is walking on a rope now.

[egghead]

An easy way to rid debts
LET'S say George visits from America and passes an art gallery in Ang Mo Kio.
He spots a lovely painting of a naked girl and asks the owner, Terrance, 'Is this pornography or art?'
Terrance says it's art so George whips out a $1,000 note as a deposit.
When George leaves the store, Terrance grabs the money and runs over to settle a $1,000 debt he owes to his daughter's tuition teacher, Ms Tay.
Ms Tay has a gambling problem and gives the $1,000 to her brother, Desmond, to repay money she had borrowed to play 4-D.
Desmond says, 'Thanks Sis' and uses the money to pay Calvin at Cool Computers where he had purchased a notebook on credit.
Calvin uses the $1,000 to pay Eric Wong for fixing his car six months ago.
Eric is a full-time mechanic and part-time art lover. He takes the $1,000 to his art dealer, Terrance, where this story began. He pays the final instalment on a picture he bought last year.
The next day, George shows up with his wife and - too bad - she won't have that naked girl in her house. Terrance has no choice but to refund George's $1,000 deposit.
Think about it. George left a $1,000 deposit and took it back the next day.
No income or profit was generated. Somehow, however, it has caused $5,000 of debts of five people to be repaid. All can now look optimistically toward a debt-free future.
Is this a solution to the world's financial crisis? Can we do the same to eliminate a few trillion dollars of worldwide debts?
It's food for thought.

If you study the above example carefully, each person in the above chain has a net debt of zero so there is no debt to be eliminated to begin with - much less the "total" debt of $5,000.

[Temperament]

An easy way to rid debts
LET'S say George visits from America and passes an art gallery in Ang Mo Kio.
He spots a lovely painting of a naked girl and asks the owner, Terrance, 'Is this pornography or art?'
Terrance says it's art so George whips out a $1,000 note as a deposit.
When George leaves the store, Terrance grabs the money and runs over to settle a $1,000 debt he owes to his daughter's tuition teacher, Ms Tay.
Ms Tay has a gambling problem and gives the $1,000 to her brother, Desmond, to repay money she had borrowed to play 4-D.
Desmond says, 'Thanks Sis' and uses the money to pay Calvin at Cool Computers where he had purchased a notebook on credit.
Calvin uses the $1,000 to pay Eric Wong for fixing his car six months ago.
Eric is a full-time mechanic and part-time art lover. He takes the $1,000 to his art dealer, Terrance, where this story began. He pays the final instalment on a picture he bought last year.
The next day, George shows up with his wife and - too bad - she won't have that naked girl in her house. Terrance has no choice but to refund George's $1,000 deposit.
Think about it. George left a $1,000 deposit and took it back the next day.
No income or profit was generated. Somehow, however, it has caused $5,000 of debts of five people to be repaid. All can now look optimistically toward a debt-free future.
Is this a solution to the world's financial crisis? Can we do the same to eliminate a few trillion dollars of worldwide debts?
It's food for thought.

If you study the above example carefully, each person in the above chain has a net debt of zero so there is no debt to be eliminated to begin with - much less the "total" debt of $5,000.

If George has not deposited $1000 with Terrance, there will be $1000 debt for 5 people, isn't it?

May i understand your point of view?
Sorry my IQ is only low to average.
That's why i want to keep on learning for a lifetime from anyone willing to share & teach.
Shalom.

[egghead]

May i understand your point of view?

Before George appears:

Terrance owes Tay $1k, but is owed $1k by Eric, so net debt is zero.
Tay owes Desmond $1k but is owed $1k by Terrance, so net debt is zero.
Desmond owes Calvin $1k but is owed $1k by Tay, so net debt is zero.
Calvin owes Eric $1k but is owed $1k by Desmond, so net debt is zero.
Eric owes Terrance $1k but is owed $1k by Calvin, so net debt is zero.

[Temperament]

May i understand your point of view?

Before George appears:

Terrance owes Tay $1k, but is owed $1k by Eric, so net debt is zero.
Tay owes Desmond $1k but is owed $1k by Terrance, so net debt is zero.
Desmond owes Calvin $1k but is owed $1k by Tay, so net debt is zero.
Calvin owes Eric $1k but is owed $1k by Desmond, so net debt is zero.
Eric owes Terrance $1k but is owed $1k by Calvin, so net debt is zero.

i agree arithmetic sum is correct.
So it seems this 5 people have free money by using credit merry go round among themselves.
Maybe this what we call "Barter Trade" in the old days.
No money is needed.
Ha! Ha!

[specuvestor]

^^^ This is actually called the Paradox of Thrift. When velocity of money increases, wealth and prosperity increase.

To understand why we have to understand the first principle of money which is a medium for exchange, to remove the problem of bartering. And exchange only happens when economic activity increases. That will also give you an idea of why gold backed currencies doesn't work.

So when Fed increases money supply, this principle starts to work. George is like the Fed. But it is not free. If not done properly runaway inflation is the cost, and the other irony is because EVERYBODY pays inflation cost it is deemed to be fairer, or rather nobody cares. Tragedy of the commons but makes it the easiest way out for policy makers to inflate away their debt

In an open economy with FX and Balance of Payment it is bit more complex but the idea is similar

[Temperament]

^^^ This is actually called the Paradox of Thrift. When velocity of money increases, wealth and prosperity increase.

To understand why we have to understand the first principle of money which is a medium for exchange, to remove the problem of bartering. And exchange only happens when economic activity increases. That will also give you an idea of why gold backed currencies doesn't work.

So when Fed increases money supply, this principle starts to work. George is like the Fed. But it is not free. If not done properly runaway inflation is the cost, and the other irony is because EVERYBODY pays inflation cost it is deemed to be fairer, or rather nobody cares. Tragedy of the commons but makes it the easiest way out for policy makers to inflate away their debt

In an open economy with FX and Balance of Payment it is bit more complex but the idea is similar

Well put.
The more a country trades (aka "produce" also), the more prosperous the country should be.
But i think the wealth not necessary filter down to everyone. Especially the low wage workers (FTs)?

[kazukirai]

^^^ This is actually called the Paradox of Thrift. When velocity of money increases, wealth and prosperity increase.

If I'm not wrong, what's been described isn't the Paradox of Thrift at all.

From Wiki:

The paradox of thrift (or paradox of saving) is a paradox of economics, popularized by John Maynard Keynes, though it had been stated as early as 1714 in The Fable of the Bees,[1] and similar sentiments date to antiquity.[2][3] The paradox states that if everyone tries to save more money during times of economic recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy.

[kazukirai]

Well put.
The more a country trades (aka "produce" also), the more prosperous the country should be.
But i think the wealth not necessary filter down to everyone. Especially the low wage workers (FTs)?

Uncle Temper,

Trade and Production isn't exactly the same thing in Economics.

Trade is just a component of GDP, which does attempt to measure production, and in theory, the more you produce (and sell), the more you earn. This is why GDP is often used as a measure of wealth.

Trade on the other hand, has two parts to it- imports and exports. How much you earn from trade is Exports (your sales to foreign countries) minus Imports (your purchases from foreign countries). So it's not entirely correct to say that the more we trade, the more prosperous we'll be. It really depends on the value of imports relative to exports.

Of course, whether GDP is a good measure of wealth and the distribution of this wealth is a different matter altogether but I had to point out the misunderstanding in economics. Occupational hazard. =P