Why Money Printing Works (And When It Doesn’t)

How does the government raise money for spending?

With a keyboard.

  1. Congress votes to authorize some spending. For example, let’s say they want to spend $1 billion on a defense contract with a specific company.
  2. Congress tells the Federal Reserve to credit the account of this company with $1 billion
  3. Every American bank has its own bank account at the Federal Reserve, so the Federal Reserve simply goes on their computer and changes the balance of the appropriate bank account by $1 billion.

But doesn’t this lead to inflation, or even hyperinflation?

It depends. Government spending only causes inflation if the spending exceeds the capacity of the economy to produce goods and services.

In summary, the Federal Government will never be forced to default on its debt because it always has the authority to issue more dollars, and inflation will not appear as long as government spending doesn’t exceed capacity.

So how do we know when the economy is operating at less than capacity?

The most obvious signs of slack in the economy are unemployment and underemployment, along with idle factories and price deflation.

You can still get localized inflation without getting overall inflation.

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“If you think there are no secrets to be found, you are not the person who will find them.” -Peter Thiel | Yale University Class of 2016

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Austin Muñoz

Austin Muñoz

“If you think there are no secrets to be found, you are not the person who will find them.” -Peter Thiel | Yale University Class of 2016

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