A great lesson from J. Bradford DeLong of U.C. Berkeley. It’s a great example of the velocity of money and why the government doesn’t need to “just print money” to get our economy going:
Suppose that we have four agents: Alice, Beverly, Carol, and Deborah.
Suppose that Beverly has $500 in cash that she owes Carol, due in two months. Suppose that Alice and Carol are both unemployed and idle.
In one scenario in two months Beverly goes to Carol and pays her the $500. End of story.
In a second scenario Beverly says to Alice: “I have a house. Why don’t you build a deck–I will pay you $500 after the work is done. Here is the contract.” Alice takes the contract and goes to Carol. She shows the contract to Carol and says: “See. I will be good for the debt. Cook me meals so I will have the strength to build the deck–here’s another contract in which I promise to pay you $500 within 90 days if you cook for me.” Carol agrees.
Two months pass. Carol cooks and feeds Alice. Alice goes and builds the deck.
Alice then asks Beverly for payment. Beverly says: “Wait a minute.” She goes to Carol and says: “Here is the the $500 cash I owe you.” Beverly pays the money to Carol. Beverly then says: “But now could I borrow the cash back by offering you a long-term mortgage at an attractive interest rate secured with an interest in my newly more-valuable house?” Carol says: “Sure.” Beverly files an amended deed showing Carol’s mortgage lien with the town office. Carol gives Beverly back the $500. Beverly then goes to Alice and pays her the $500. Alice then goes to Carol and pays her the $500.
The net result? (a) Alice who would otherwise have been idle has been employed–has traded her labor for meals. (b) Carol who would otherwise have been idle has been employed–has traded her labor for a secured lien on Beverly’s house. (c) Beverly has taken out a mortgage on her house and in exchange has gotten a deck built. (d) Carol has the $500 cash that Beverly owed her in the first place.
Alice has more income and consumption expenditure than if she hadn’t taken Beverly’s job offer. Carol has more income and saving than if she hadn’t cooked for Alice and then invested her earnings with Beverly. Beverly has an extra capital asset (the deck) and an extra financial liability (the mortgage) than if she had never offered to hire Alice.
A deck has gotten built. Meals have been cooked and eaten. Two women have been employed. And all this has happened without printing any extra money.
Economics 101 
Well i believe that the three women turend a bad situation into a good situation by managing their time , and money wisely. In the End everyone came out ahead because of the good choices, and offers that were made.
It defiantly makes sense that there are ways to better the economy without printing money. Printing a bunch of money initially would better the economy but ultimately could lead to inflation. However, the example given only involves four people. Obviously it is too complicated to do an example on a broader scale. In the example given, Beverly has $500 in cash that she owes Carol, the majority of Americans don’t owe money to another human being but to a Credit Card Company. I don’t think that Credit Card Companies would allow someone to pay off their debt by building a deck.
It makes sense that the government doesn’t see fit to make more money in order to cure everyone’s financial problems. The value of money goes down and inflation increases. If prices rise, people will need more and more money to buy things. That won’t fix much. Prices will be beyond ridiculous high and government resources could be sapped. Also if the government just gave away enough money for everyone, people will trade and work less. For example in this article, two people engaged in trade and worked, even though they didn’t have a bunch of money from the government.
If life was that easy that the goverment could just print money and solve all our economys probelm that would be a dream.If the goverment did print out all this money to save us it would ruin our whole value of money what it is money really worth if you just print it when you need it. Their would be no achievement in making your own money.” If money only grew on trees we would all be rich” at this time right now we all probably wish this saying was so true. Only if you could plant a tree that would make money for you causing you less stress in your life especially at a time like this when we have to watch every penny and dime we spend just to make it to the next paycheck!.
This sounds to me like if everyone would spend a little bit more we’d be a little bit closer to getting our way out of this mess. This is the idea I think would be most likely to work, it’s pretty much just tricking ourselves out of it. Obama should have a national shopping day, where all the stores have big sales, and everyone spends some money. Or maybe national shopping week or something.
Neat post with a well worked example. It’s amazing how people still don’t understand the most basic of economic theory (and reality). Have you seen Paul Grignon’s “Money as Debt” video? It’s fantastic. http://video.google.com/videoplay?docid=-9050474362583451279&hl=en is the url. All the best.
If the government just prints out more money then it will be worth less. What it should do is give out money that it already has so people can spend it that way it creates jobs and work. At the moment people are only buying what they need because, money is tight. No one is buying stuff just because
The story of the women sounds intriguing but what happens when someone falter’s in the agreement? Where do they get the money to pay each other if one of the parties is unable to complete their side of the bargain? What if there are more people involved than just the four individuals it can become overwhelming. It sounds risky although if everyone complies with this scenario then it could be a win-win situation for all involved. I say print more money!
Printing more money is obviously not the solution in the case stated, all it would do is create inflation after a period of time. Money needs to be spent, invested, etc. Ultimately the currency that is printed to date needs to continue to circulate because that is what keeps our economy going.
The solution these women came up with solved their problem, without the necessity of printing more money. However in this case it was just four people involved and they were dealing with cash. With the economic crisis going on right now, most of they people in debt are because of their overwhelmed credit cards. Being realistic, no credit card company will allow you to pay them by cooking for them. These people have to come up with cash to pay the debt on their credit cards. Although this system of paying off each other with labor and food worked for them, it will not work right now in this situation the United States is involved in.
Why the U.S. DOESN’T need to Print More Money
What if Alice buys $250 worth of materials from Home Depot and Home depot sends $200 of freshly printed dollars to China to pay the Chinese people to make the materials. What if there are millions of Alice people who repeat this action every few days and the Chinese accumulate large quantities of our freshly printed dollars, T-Bills, Bonds, etc. Since the US government stopped redeeming US dollars for gold, the Chinese use these freshly printed dollars (and other freshly printed US securities that they earned in exchange for their products that they exported to the USA) to purchase title to real estate, forests, industries, breweries, hotels, factories, casinos, financial institutions and everything else of value that is located in the USA. We paid these foreigners with our freshly printed dollars to manufacture or supply the things that we imported and consumed (rather than US citizens working to make these products ourselves in this country). Some government sources estimate that 25% of our property and businesses are now foreign owned (http://www.economyincrisis.org/content/ownership).
The dollar buying power or value is partly about psychology when it is backed by the “full faith and credit of the US government” rather than gold. This is the same as my definition of “Junk Bonds”. Only a positive balance of trade will restore the value of the dollar, and we must accomplish this by any means possible, or accept third world poverty on a large scale basis. Riots and insurrection are predictable, ala the French Revolution, when the people find their situations economically hopeless.
It is not the foreign manufacturer’s fault that this condition exists. We created this condition ourselves. We purposefully destroyed most of our industries and fired all of the employees that were located in the US for various reasons. Why should we work and make the things that we consume as long we can get people in other countries to work to make these things for our consumption? We can pay them with freshly printed-paper currencies and other types of freshly printed-paper securities (Junk Bonds). They can redeem these freshly printed-paper currencies by exchanging them for title to our real estate, hotels, forests, breweries, casinos, factories, and our remaining businesses (instead of Gold). Our Stupid Legislators, Ignorant Government Employees, Self Serving Corporate Managers, Greedy Unions, Wall Street Financial Genius Criminals, Enron and Arthur Anderson type Master Criminals, NAFTA, EPA, WTO, and OSHA, just to name a few, have created this situation.
How can we ever re-start our industries (re-industrialize) to generate a positive balance of trade that will restore our economy? Most of the men who knew how to operate the US basic industry and factories were fired 30 years ago and are now long dead. There are no books that completely tell how to do most of the things that we knew how to do years ago when we created the industries that won WWII and then gave us our bountiful way of life. We need science-oriented citizens to create products and services that we can exchange for foreign currency and foreign gold.
How can we ever re-start our industries (re-industrialize) to generate a positive balance of trade that will restore our economy? Most of the people who knew how to operate the US basic industry and factories were fired 30 years ago and are now long dead. There are no books that completely tell how to do most of the things that we knew how to do years ago when we created the industries that won WWII and gave us our bountiful way of life. We need science-oriented citizens to create products and services that we can exchange for foreign currency and foreign gold. According to the National Science Foundation and the National Society of Professional Engineers, only about 5% of the current college students in the USA are getting a degree in science, medicine, mathematics or engineering are US citizens. In the Asia the majority of the college students are majoring in these subjects. I am worried about the future of my college age children, and all of the other children in the USA.
good article
So in essence this is saying that a scenario like this can occur for industries within the United States ? And that there is a solution out there without the government printing more money? It’s kind of going around in my brain because I understand the concept – one business can do this and another business can do that in exchange for other goods or services that they need anyway, and with limited resources. Something just doesn’t click for me though because there seems to be a step missing. Although perhaps that step is just the income part of it all – that everyone is looking for a profit also and that doesn’t really fit into the equation.
The US does not need to print more money because with more money being printed it takes away the value of he dollar making our currency much cheaper then foreign mediums. Therefore theere will be a major inflation and if we printed more money we can not back up the amount of gold that backing up the standard of the dollar.
Obviously if the economy is poor, creating more useless backing of it, isn’t going to increase its worth. If you have a piece of flank steak, its amazing if you have 10 pieces of flank steak, its still amazing, but only for as long as you can eat it, after that its just more flank steak, it doesn’t get any better just because you have 10 more pieces.
Everything works perfectly in theory, but when you put it into practice unknown variables come into play and will change the playing field. Like LK Economics said, what if a debtor does not pay? If during those two months Beverly encounters a financial hardship that needs the immediate attention of say, $500, then she becomes in debt to two people- Alice and Carol. Because of this Alice then becomes in debt to Carol for the meals. Sometimes the simple solution (Beverly paying the $500 cash to Carol) is the best solution.
I can’t stand when I hear about the U.S. printing more money, it’s like come on we’re already up to our eyeballs with inflation and printing more funny money does nothing to solve our crisis.
I really enjoyed this blog post because it shows how you can achieve the same prosperity without injecting smoke into the economy and effectively lowering the value of everybodies money…in turn producing more inflation which then causes more money to be printed and etc.
It has to end somewhere.
I agree, printing more money is not the answer. I like this article but there is no way, everything would go down that exact way. It hard enough to get two economist to agree, so how do you get uneducated to work this out. All it would take is one girl to get pregnant or get a man. Thing do need to change, maybe it just a madder of education.