Borrowing vs printing new money and inflation

yammycat

Printing new money causes inflation I heard, how does this differ from borrowing money.

Lets say the government has no money left, whats the difference between printing 10 billion and borrowing 10 billion, there's still another 10 billion floating about, how does the source impact on inflation

UrbanSea

Are you referring to a country in general or Ireland?
We can't print money,that's the sole right of the ECB,I think.

America can print their own for example.
However,more money in circulation causes inflation.
Borrowing money means money will be leaked out of the economy in other areas,hence inflation shouldn't be as great.

yammycat

UrbanSea wrote: »

Are you referring to a country in general or Ireland?
We can't print money,that's the sole right of the ECB,I think.

America can print their own for example.
However,more money in circulation causes inflation.
Borrowing money means money will be leaked out of the economy in other areas,hence inflation shouldn't be as great.

Just in general, not ireland specifically, why would borrowing lead to leakage and not printing ?

Eoin Cunniffe 94

If you print more money it basically destroys the value of your currency because their is so much in circulation and also causes massive inflation. It's a sure way of killing your economy totally !

yammycat

Eoin Cunniffe 94 wrote: »

If you print more money it basically destroys the value of your currency because their is so much in circulation and also causes massive inflation. It's a sure way of killing your economy totally !

I know we borrow a lot of money but I have never seen any other currency in circulation here but legale tender be that punts or euro, whether we print 10 billion or borrow 10 billion there is 10 billion more circulating, I still don't see the difference

Eoin Cunniffe 94

yammycat wrote: »

Eoin Cunniffe 94 wrote: »

If you print more money it basically destroys the value of your currency because their is so much in circulation and also causes massive inflation. It's a sure way of killing your economy totally !

I know we borrow a lot of money but I have never seen any other currency in circulation here but legale tender be that punts or euro, whether we print 10 billion or borrow 10 billion there is 10 billion more circulating, I still don't see the difference

It's not just because there is more in circulation there are numerous reasons. The more you print it devalues the currency leaving us with completely worthless currency.
And the borrowed money is leaked out through imports etc without devaluing the currency

yammycat

Eoin Cunniffe 94 wrote: »

It's not just because there is more in circulation there are numerous reasons. The more you print it devalues the currency leaving us with completely worthless currency.
And the borrowed money is leaked out through imports etc without devaluing the currency

the printed money would be leaked out through imports too no ?

FISMA

yammycat wrote: »

Printing new money causes inflation I heard, how does this differ from borrowing money.

Lets say the government has no money left, whats the difference between printing 10 billion and borrowing 10 billion, there's still another 10 billion floating about, how does the source impact on inflation

Suppose there was a million $'s in existence and America borrowed 1 million dollars from you.

Then, when they were repaying their debt, what if America decided to print one million new dollars. That is, they double the money supply. Also, consider that there was nothing new to back up the extra $'s.

Would you be happy? Probably not.

That's what gov'ts love to do. Borrow expensive $'s and pay back cheaper $'s. It makes their old debts like pensions look like peanuts.

Sort of sounds like "I will gladly pay you Tuesday for a hamburger today."

Eoin Cunniffe 94

the printed money would be leaked out through imports too no ?[/Quote]

But the money borrowed is already in circulation before we borrow it so it's not adding to the money in circulation therefore not devaluing the currency Or causing inflation! But yes more than likely some would be leaked out .

yammycat

FISMA wrote: »

Suppose there was a million $'s in existence and America borrowed 1 million dollars from you.

Then, when they were repaying their debt, what if America decided to print one million new dollars.

But I don't know how many dollars there are, does everybody count the total amount of x currency before accepting a payment of a debt.

Slippers

Say that the American public has $10 million.

Print:
If the government prints $2m and spends it the public will have $12m.

Borrow:
If the government wants to borrow $2m they will print bonds and sell them for $2m. Now the public has $8m and $2m worth of government bonds. When the government spends the money the public will have $10m again and $2m of bonds.

The only difference at the end is that the public has bonds instead of cash.

Holding bonds instead of cash doesn't make it harder for a member of the public to spend what they want, they just sell the bonds to someone else and spend the proceeds. So I think there will be about the same amount of spending either way.

Say the $2m of government spending plus the spending by the public is more than the spending that there was last year. If there is spare capacity in the economy (unemployment, short hours, idle factories) there will be an increase in production and employment. If there isn't spare capacity and spending is more than it was last year then prices will go up.

nesf

Slippers wrote: »

Say that the American public has $10 million.

Print:
If the government prints $2m and spends it the public will have $12m.

Borrow:
If the government wants to borrow $2m they will print bonds and sell them for $2m. Now the public has $8m and $2m worth of government bonds. When the government spends the money the public will have $10m again and $2m of bonds.

The only difference at the end is that the public has bonds instead of cash.

Holding bonds instead of cash doesn't make it harder for a member of the public to spend what they want, they just sell the bonds to someone else and spend the proceeds. So I think there will be about the same amount of spending either way.

Say the $2m of government spending plus the spending by the public is more than the spending that there was last year. If there is spare capacity in the economy (unemployment, short hours, idle factories) there will be an increase in production and employment. If there isn't spare capacity and spending is more than it was last year then prices will go up.

That assumes a closed economy though.

Slippers

Replace 'the American public' with 'everybody in the world who is not the US government'. I'm not sure how to proceed after that.

nesf

Slippers wrote: »

Replace 'the American public' with 'everybody in the world who is not the US government'. I'm not sure how to proceed after that.

That assumes perfect flow of capital into and out of the country though, which is not always the case with countries who can become capital starved or awash with excess capital etc.

Slippers

How about,

If the government prints $2m and spends it the world will have $12m.

If the government wants to borrow $2m they will print bonds and sell them for $2m. Now the world has $8m and $2m worth of government bonds. When the government spends the money the world will have $10m again and $2m of bonds.

Where do borders and capital flows come in?

Also, I'm relatively new to this so I'm wondering what we are calling capital; assets minus liabilities on a balance sheet, physical equipment, or money?

nesf

Slippers wrote: »

How about,

If the government prints $2m and spends it the world will have $12m.

If the government wants to borrow $2m they will print bonds and sell them for $2m. Now the world has $8m and $2m worth of government bonds. When the government spends the money the world will have $10m again and $2m of bonds.

Where do borders and capital flows come in?

Also, I'm relatively new to this so I'm wondering what we are calling capital; assets minus liabilities on a balance sheet, physical equipment, or money?

I think it has to come down to whether the economy can grow or not in line with the increase in the money supply. My point about borders and capital flows is that money supply doesn't necessarily smoothly adjust to meet demands between countries. It's been years since I've done this stuff so I'm fairly rusty but I think there's an issue with looking at the world money supply in the way that you're doing in that there's a local drop in money supply in the lending country and a local increase in money supply in the borrowing country.

BarginHunting

how does the source impact on inflation

You must think of MONEY(M) as a good, it's purchasing power is subject to supply(Ms) and demand(Md).

Print Money- you debase the currency. Md is constant but Ms has increased by 10bn. Real interest rates decrease.

Borrow Money- issues bonds. The govt buys the domestic currency and issues IOU's. Now Ms has decreased, holding demand constant, real interest rates rise.

This is all you can infer from your question. The impact on inflation from the source will depend entirely on the characteristics and current state of the economy- are we talking about a small open economy? Are we operating above/ below potential GDP? Etc

For example: FED recent QE programs(printing money), inflation is only now beginning to rise, still modest and within the CB target level. Implement that policy in China over the same period and inflation would have soared uncontrollably. Hence your two policies, printing money and govt borrowing will impact inflation in different ways dependant on the state of the economy!