I Need a Lesson in Basic Economics. Why Don't We Print More Money?

[Tortington]

I was reading this when i decided i needed a lesson in basic economics.

I was talking about the state of the country with my SIL the other week when her 17 yo daughter said " why don't we just print more money"

i Naively said something along the lines of it all being relative and that if you print a lot of money, the money that you are printing wont be worth anything.

then the article linked to above - kind of made me think i need a lesson in economics.

its not very readable that article i don't think - but please read it and tell me why printing money is a good idea?

Singforsupper - the problem is that if you are the producer of iron ore there is no reason for you to say that you'll sell at a certain price if you suspect the price will rise and you know that you have more than one potential customer.

Basically that iron ore producer will not be making as much profit as he could as the chances are there is another buyer who will pay that higher rate if the supply is limited.

Personally, and I too did economics at uni, I would say that problems really started when the US allowed (and we followed natch) its normal banks that deal with 'normal customers money' to start investment arms. It was all this massive speculation with money borrowed from Peter, Paul, Mary, Mary's friend in the next street, her cousin and her sister's cousins best friend to buy stocks in companies that were not necessarily acting in the best accounting practices (Enron etc) that have led to such problems.

What do we want to talk about next? Hedge funds?

But isn't there something called fractional reserve banking which means the banks ARE lending out money they don't have??

Kind of, they actually create money. Here's a couple of vids :)

singforsupper - re "iron ore is measured in USD. Why is it measured in that?"

I will have to reply "Because that is just the way it is". Just like oil price is in USD and gold price is in USD.

"can't they make a contract with the buyer to say that I promise to sell x quantity of ore at x price on x date in x currency?

This is pretty much what happens in futures markets, except the currency part. You manage currency risk separately, through futures & options.

Actually, iron ore wasn't the best example, because it is not a very efficient market since prices are mostly determined in negotiations with major producers.

Let's talk about a steel producer who just uses scrap metal (rather than iron ore): Prices of his raw material (scrap) and end product (various types of steel) are quoted at the London Metal Exchange (in USD, in case you are wondering ). This company can use futures to lock in future profit margin by buying raw materials and selling products at a future date, at a predetermined price.

I'm just trying to point out that there are very legitimate reasons for the existence of futures and options markets, and that it is not just once big casino where adrenaline-junkies make or lose fortunes.

"But isn't there something called fractional reserve banking which means the banks ARE lending out money they don't have??"

In one word: NO. That is not what "fractional reserve banking" means at all.

Fractional banking is practically all banking and refers to the obvious fact that banks only keep a small percentage of deposits in their coffers. The rest goes to the loans and mortgages they give out. This is their business, incidentally.

If banks were to keep 100% of deposits they are given as cash in their vaults, they would make no money out of this hoard of money, and could not be expected to pay interest on it.

But with fractional reserve banking also comes the whole issue of 'gold reserves' : store of % value by the banks against the issuing of the notes/depositors

"problems really started when the US allowed (and we followed natch) its normal banks that deal with 'normal customers money' to start investment arms. It was all this massive speculation with money borrowed from Peter, Paul, Mary, Mary's friend in the next street, her cousin and her sister's cousins best friend to buy stocks in companies that were not necessarily acting in the best accounting practices (Enron etc) that have led to such problems."

I'm not quite sure what you mean by this, tbh.

I'm assuming you mean "normal customers" = commercial banking customers, and "investment arms" to mean investment banks or other financial institutions that acts as stock market brokers.

My objections to the statement above are:

(1) Commercial banking customers are very often also investment banking customers, for the simple reason that many people with some money in savings diversify - some money in long term saving accounts (with minimal interest rates), some in bonds (higher returns than saving accounts but low-risk), and some in the stock markets (potentially high returns with high risk). This is entirely normal and is not a nefarious development whereby the whole financial system has been led astray.

(2) Commercial banks don't as a rule start investment banking arms (or build any other subsidiary with a different business) with deposits from commercial banking arms. If you have ever signed the many contracts needed to open an investment banking account, you would remember that these are very different than those necessary for a simple deposit account. Clients open separate accounts with investment banks, which they authorize for investment banking transactions. (Or am I misunderstanding what you said?)

(3) Related to (2), it is not at all the ownership structure of commercial & investment banks (whether some are owned by the same entity) that caused the credit crisis. In fact, the first dominos to fall were purely investment banking firms such as Lehman Brothers and Bear Stearns, and not those that have both commercial and investment banking arms like Citibank.

(4) Investment banking is not "massive speculation", although some adrenaline junkies / gamblers might use it as such. Just like the futures/options market I gave very legitimate examples for earlier, stock markets = capital markets are there so that companies can raise money for various reasons that don't involve begging a bank for money and having to pay interest on that money. I'm sure that this was covered at your university courses on the subject.

(5) Enron is a criminal problem, not a systemic one. Its management were crooks who were hiding their criminal activities. I'm not sure you can tie such criminal activity (which you have to admit is few and far between) to the financial crisis that covered the whole world.

"But with fractional reserve banking also comes the whole issue of 'gold reserves' : store of % value by the banks against the issuing of the notes/depositors"

Fractional reserve banking has nothing to do with whether a currency is backed by gold in the country's reserves, and neither was what we were talking about earlier when I said "banks can't lend the money they don't have" which is when you stepped in.

Fractional reserve banking is a commercial banking practice, where only a small percentage of deposited cash is kept in coffers and the rest is invested/loaned out as credits, mortgages, etc.

Commercial banks don't have gold reserves, central banks like Bank of England do. Since 1971, all major currencies are what we now call "fiat currencies", i.e. Their total value in circulation does not depend on their country's gold reserves.

What we were previously talking about was government bonds = gilts = treasury bonds, which are basically the money that banks and the public lend the state. I was saying that a bank can't buy government bonds unless it has the money to do so - i.e. It can't lend in this context unless it has the money to buy the bonds.

So, three different issues.