Printing Money out of Nothing
Mar. 13, 2008

Living in La-La Land

Let’s take an intellectual journey to a make believe world; the real world is too complicated to wrap our minds around. In our fake world, there is only one product. Let’s say the product is houses; our make believe people have to live somewhere! A house costs $10,000. Five-hundred houses exist in the make believe economy. In order to make buying and selling homes convenient, the government prints paper money. In order to ensure there is enough money to cover the cost of all the houses, the government printed $5,000,000. The money is backed by a real product, a house-standard. This money goes into the economy.

Now let’s say the government decided one day that it wanted to give each citizen a rebate. The citizens are excited to have a little extra money. For fun, let’s assume the government has printed up another $1,000,000 dollars. All the citizens get a little dose of love from their government. What do you do with extra money in a one product economy? Well, I don’t know and I am not going to put too much mental energy into thinking about it. That isn’t what we are trying to learn.

After this extra money is introduced into the economy, one of our fake friends decides he wants to sell his $10,000 house and move to another house. Our fake friend is surprised to learn that his $10,000 home is now worth $12,000. He hasn’t made any improvements to the home. Did the homes value go up $2000? Uh, no… the extra money printed by the government artificially inflated the value of this man’s home by 20%. There are still only 500 houses giving value to the now $6,000,000 in circulation. His dollar that used to be worth $1.00 is now only worth $0.83. The dollars in circulation are worth less, not worthless just not worth $1.00. Printing money out of nothing causes inflation.

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I am still trying to figure out how I can pay off all my bills by using this government standard. After all, if the US gov't can write checks with nothing to back it up why can't I, LOL!?

Thanks for posting this!

amlp311 - 12:51 PM - Mar. 13, 2008

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Excellent Post

Thank you for sharing it. You "know" such interesting and insightful people. ;) (It helps being one yourself.)

The Tutor - 1:23 PM - Mar. 14, 2008

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