how can a country ever run out of its own money?

Question

I cannot get this through my head. How can countries ever owe money to other ones? I don't understand. The government MAKES the money, so how can it ever be in "debt"?

Is there perhaps only a certain amount of money that could be in circulation, or is there a major flaw that is not knowable to the people, a joke?

Answer 1

First of all just because the government "makes money" does not mean they can just make as much as they like.
Believe it or not it can be better for the government to go into debt than to just print more money. Printing more money lowers the value of all the money and so makes it even harder for the government to continue to balance the budget. And the people spending the money are not the same people responsible for how much money is made. In the US the Federal Reserve is responsible for managing the money supply. The board of the federal reserve is appointed by the president and confirmed by the senate - but they are autonomous- they do not have to follow instructions of the President or congress. This means they will continue to work in the long term best interests of the country - not just short term political gain.
Secondly money is a much more complex issue than just notes and coins (for instance when you put money into the bank - it is still money but you do not have notes and coins).
So when the government borrows money it increases the money supply, just in a different way to printing more money.

To understand better how money is created and how fiscal policy determined read up. It is rather complex so if you have any more questions I suggest you post them under the economics section of YA which you will find in Social Sciences. There are always many people with thorough economics knowledge (as well as some clueless idiots) there to help you.

http://www.federalreserve.gov/
http://en.wikipedia.org/wiki/Money_supply

Answer 2

A country's money is only valuable because of a few things:

1.) How much of it is in circulation - the amount of money out there will determine how much of the nation's Gross National Product each denomination and currency note (piece of money) is worth.

2.) The nation's Gross National Product (GNP). This is the value given to all the goods made and services performed by all the people and companies in a nation. By assigning a dollar value to this, it's possible to estimate just how much each bill is worth.

When a country's money is too plentiful (there's too much out there), or when the GNP falls too low, that's when a country's money value drops. This is a good reason for a country to borrow from other nations. Another good reason is if, as is the case with the USA, the country in question is spending more than it's making in GNP then it needs to borrow to afford the increased spending.

Think of it as being similar to using a credit card. We've got to pay it all back, plus interest.

And since the value of money is tied to how much of it is out there (remember: more money out there = less value for the money), printing more only makes the problem worse.

Answer 3

Yes, a gov't prints the money, but if they print too much of it, inflation runs rampant and basically destroys the economy.

Every hear stories of how some countries money supplies got so out of hand, that people would have to bring wheelbarrows full of cash to buy groceries? Or how they would have to spend their pay that day, because if they waited even a few days, their money might be worth 10% less? That's what happens when printing too much money.

When that kind of thing happens, investment, savings and lending stop, and the economy is ruined.

So a nation has to keep the amount of money out there fairly stable, adding enough to compensate for population growth and GDP growth, but not much more.

If the gov't needs more money to operate, it sells debt, which will be paid back with future tax receipts.

Does that help?

Answer 4

Countries don't necessarily "run out" of money in the literal sense. Like you said, they can simply print more. However, countries, because of debt and other reasons, can have their money incredibly devalued. A great example of this is when people living in the Soviet bloc would take wheelbarrows full of money to the grocery store or use their treasury notes for toilet paper. Also, people in other countries can buy US dollars and hold them, much like people do stocks, hoping that its value will rise. This is what happens when you go overseas and visit the money exchange booth. You are selling your dollars for a certain number of pounds, yen, shillings, etc. The same is true of investment. The reason that our dollar is devalued right now is partly because of our governments debt, but also because our trade imbalance (we're importing more than we export) has left a surplus of dollars overseas. I could explain it a lot better, but I would need and easel and some charts.

Answer 5

Because if they just made more money the value of a dollar would go down. We can't have more than a certain amount of American money floating around, because that would chance it's value. For example, trading cards. If you have too many, no one wants them anymore because there's so many. But if you come across a rare one, it's high value. So if they produced more money to give to another country, the value of the American dollar would go down, and if the original debt was $5 and they made $5 to pay it, they would now have to pay $5 more, because the value has decreased.
Hope this helps.

Answer 6

always think in terms of supply and demand. if supply goes up, (print more money), demand goes down, (this would be inflation), and the money is less valuable. if you have a limited supply of money, it's more valuable., and has greater purchasing power.

if a countries money is more valuable than another countries currency based on a given exchange rate, well you can buy more of their stuff for one of your dollars than they can of yours. that is a trade surplus. the other way is a trade defecit......

so, you want to maintain a strong value of your money supply. and printing too much hurts that.....that's my story and i'm sticking to it!

Answer 7

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