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burntbridge | 4 years ago

The "uninhabited farmland" is just an analogy for some area of the economic landscape that when you spend money on it, can absorb labor and return a tangible benefit that is equal or more than what you spend. Maybe for example repairing worn out infrastructure or creating new infrastructure.

>The vast majority of the money the Fed prints goes to financial institutions

You maybe thinking of Quantitative Easing. In which case financial institutions are just incentivized to cash in their Government Bonds, whereby they need to look for some place else to put the money, hence perhaps asset inflation. The Government doesn't just print a whole lot of money and give it away to someone.

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pdonis|4 years ago

> The "uninhabited farmland" is just an analogy for some area of the economic landscape that when you spend money on it, can absorb labor and return a tangible benefit that is equal or more than what you spend.

Such areas aren't doled out by the government. They're invented by entrepreneurs. Your "uninhabited land" analogy obscures that vital point since uninhabited land is not invented, it's already there.

> Maybe for example repairing worn out infrastructure or creating new infrastructure.

As I already pointed out, if there are things like this that are worth doing, and there are unemployed people who can do them, the government can just use tax revenue to pay them to do it. There's no need to print new money.

> You maybe thinking of Quantitative Easing.

That's one way of doing it, which has been common in recent years, yes. But it's not the only way.

> The Government doesn't just print a whole lot of money and give it away to someone.

The government goes to great lengths to try to convince people that it's not doing that. But economically speaking, that is what it's doing.

When someone "cashes in" a government bond under "quantitative easing", the money they get is not taken from currently existing dollars. The dollars are newly printed money; they are newly created purchasing power that is given to whoever is "cashing in" the bond. That purchasing power doesn't come from nowhere: the purchasing power of a dollar is not fixed, it's determined by the total number of dollars in circulation. So printing new dollars and giving them to someone, even if it's in exchange for a "government bond", is still increasing the total number of dollars in circulation, and that means the purchasing power represented by the new dollars is taken from everyone else who holds dollars.

For a simple example, if there are a thousand dollars currently in circulation, and I "cash in" my government bond for 100 dollars of "quantitative easing", there are now 1100 total dollars in circulation, and I now have 100 dollars of purchasing power that was obtained by reducing the purchasing power of all other dollars by 10 percent. It's economically equivalent to taking 10 cents in tax for each dollar of the 1000 dollars that existed before, and giving it to me. Calling it by some other name doesn't make it something else. It just obfuscates what is actually going on.

(The Fed can in principle also destroy money, by selling securities and retiring the dollars that it gets for them, but historically it has almost never done this.)