If the US prints money to pay off debt then why not print money in the first place instead of borrowing?

Question

US owes trillions in external debt. And also a significant amount to China. The Federal Reserve keeps creating money out of thin air to pay off some of the debt. So why not print money instead of borrowing and then printing money to pay off the debt?

Answer 1

First, the majority of US dollars are not in bills. They are numbers stored in computers and they travel around the world not as paper money but as checks and electronic checks. So where did this money come from?

The Fed is not allowed to just print money because it needs collateral which is usually in the form of federal treasuries (US bonds). So, yes, they can technically order the printing agency to print money but by law they need collateral, usually treasuries which are originally issued by the US government. Think of this money as an IOU. Generally, you will not be allowed to write an IOU unless you have something to back it up. Money is basically a big IOU from the US government broken up into smaller IOUs. It can only print as much money as the US wants to borrow in the form of debt. Think of money as the credit card of the US.

If the government just printed money whenever they needed cash, they would be the equivalent of kings or tyrants that just take whatever they need in exchange for paper. Unless that paper is backed by something, it is still just paper. Btw, see any similarities with working your *** off for two months to buy a piece of shiny rock some guy dug out of the ground on land he just decided he owned? Give me your food/labor/electronics equipment/fighter jets etc. and I will give you this worthless piece of paper in return! So by backing spending with treasuries, the US government is promising to pay back the value of what they consumed with interest. They have to pay interest or else no one would be willing to sell them any goods because they could sell it to someone else and get money today rather than sometime in the future. So imagine what would happen if the US just started printing money without backing it with an IOU. US money would quickly become worthless and we wouldn't be able to use it to buy anything across our borders.

Answer 2

thats a really diffucult question and not easily answerable unless you want an essay! I dont know much about US politics or its policies but what i do know is that the market fucntions as an abstract value structure. So money does not have any value unless its integrated into the market through physical means and depending on the strength of your dollar will depend on business ventures. You say the Federal Reserve prints off money to pay debt, (i didnt know that) but if that is the case, it may be repaying some of the debt but it is also losing value in its own currency by doing so. Meaning the US will start to have troubles in its economy and at the moment we're seeing how everyone at wall street is becoming a little anxious.

Im not sure that i have helped you much but i found the question interesting andhope i have given you some insight that you didnt already know. Hit me back with questions or info whenever.

max

Answer 3

You ask a good question. But, first, it is incorrect to say that the Fed is creating money to pay off debt. In the US the Fed and the rest of the government are independent of one another. The Fed is in charge of setting interest rates, and the rest of the government (mostly Congress) decides how to raise taxes, spend money, and increase or decrease the debt level.

If the Fed were to increase the money supply so quickly, however, there would be a sharp increase in prices. Perhaps such a large increase that the economy would collapse.

The other options are just as bleak. If Congress tried to slash spending in order to lower debt, there would like be a recession.

Answer 4

The standard answer is that countries that can just print as much money as they want end up printing way too much money and having inflation. So we require that bonds are borrowed to print money, which means that people have to have confidence in the dollar (when they redeem the bonds). This is supposed to prevent too much money from being created.

Whether the standard answer is correct, I am not sure, since i have not studied in detail the history of the bill. But I imagine the machinations were required to obtain passage. I think the first bank the US created was a dismal failure, so they had to shore up confidence.

It is also true that it is a huge boon to investment bankers who get to profit from the newly made (1913) government industry of printing money.

Answer 5

Using the term "print" for money creation is misleading, what is really being provided is liquidity. Homer has a clear explanation of the process in the previous question.
http://answers.yahoo.com/question/index;_ylt=AvS9iiaOaue6g4WCcrGADnMVxgt.;_ylv=3?qid=20070922211716AAwCkdV
As the economy grows and economic conditions change more money is needed for commerce, and the Fed creates the money with the proceed effectively paying down the debt. If too much money is created it produces inflation , and too little slows economic activity. The stability and growth of the economy depends on creation of more or less the "right" amount of money.

Answer 6

I don't think it's wise to do that. we might go through inflation as a result of printing more money and that might decrease the dollar value.

Answer 7

Nobody knows what each country does underground for its survival.