Why Doesn't the Government Just Print More Money? Some Economists Are Arguing for More Money

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3:38and applicable terms. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab.

3:55So a bunch of you tagged me in this clip that's been going around on social media. It's this really cringy video of Jared Bernstein, who's the chair of the Council of Economic Advisers to Biden, stumbling over his words as he attempts to answer this question. Why does the government borrow money when it could just print more money? Now, we do not know what happened in this edit room, but Mr. Bernstein does not look great. He says a lot of us and says the question is confusing and says the government borrows money through bonds and then says, is that what they do? But I'll link the full clip in the episode description in case you haven't seen it, but it's not a really good look.

4:34The clip is from a documentary called Finding the Money, about a new school of economic thought called Modern Monetary Theory, featuring the economist Stephanie Kelton. The scene in question goes down in the first 15 minutes, so it's super secondhand embarrassing to watch. So today, I'm going to help Jared out and break down why the government borrows money and modern monetary theory in a way that is crystal clear. Let's start with a look at the current money-making machine in the U.S. in 2024. The U.S. government prints its own money. Remembering that fact is key to everything we're going to talk about today.

5:09The Department of Treasury prints the actual bills, but money is digitally created when the Federal Reserve buys securities like bonds and pays for them with newly created dollars. Yes, money is also created by banks when they loan out money that they're holding in their reserve, but we have plenty to cover at the federal level today, so that's a rabbit hole for another day. In some ways, it would be pretty cool if the US could just print money whenever it needed money. Because instead of doing that, the US gets money from bonds or taxes. Bonds are great because if you buy a bond, the government gives you your money back and then some.

5:44Taxes are less of a crowd pleaser because that's essentially the government taking some of your money away. So if the government could just print money instead of mandating taxes, that would be pretty sweet. But that would also be problematic. And the reason it's problematic actually goes back to the origin of the U.S. dollar itself. The U.S. has a fiat currency. Fiat currency is a type of currency that isn't backed by something physical like gold, but instead the U.S. dollar is backed by the goodwill and credit of the U.S. government, which sounds really corny, but the whole financial system is built on trust.

6:18When you tap your phone to pay at CVS, you're trusting that they're going charge you for your granola bar and not stick you with a bill for 700 bucks. You're trusting that the bank will have your money and then send it to CBS. I mean, what's a little more faith in the process, right? For a long time, the US government did actually back their money with gold. They limited the amount of currency in circulation to the amount of physical gold in a vault. Until January 30th of 1934, you could, in theory, turn in your dollar for the equivalent amount of gold, and then the government would shred your dollar and you would have the gold.

6:53The end. The government would have to shred the dollar because you would have the gold and the dollar would be unbacked. Putting aside the issues of storing the 60 ,080 ,816 pounds of gold needed to back the current amount of U.S. dollars in circulation, basing your currency on the number of shiny rocks you can get out of the ground has some even bigger drawbacks. If someone discovers is a gold mine, for example, the amount of gold in circulation would increase, driving down the price of gold and decreasing the value of currency, which is essentially inflation. And on the flip side, if the government failed to snag more gold as their economy boomed, it could drive up the value of the currency and cause a period of deflation, which could be totally catastrophic.

7:41So, while gold sounds stable, it's actually not. As a result, the whole world decided gold was so last century and ditched it for fiat currency. And that scenario of discovering a mine? That's why the government can't just print currency when it needs it. It leads to inflation. Let's circle back to where all of this started with the video about Modern Monetary Theory or MMT. Conventional economic thought says that we can't create more money to solve problems or we will cause inflation. MMT says we can create more money to solve problems, but it will also cause inflation and we need to prevent or fix that.

8:21But both schools of thought agree on this core question. If the United States government created more money whenever it needed it, it would cause inflation. Let's double click on the difference between those two schools of thought and why or if this difference matters. Traditional thinking is that the U.S. government is like a household. Ideally, it would be debt-free and only spend what it took in as income. In this case, taxes would be the income. The traditional goal is a balanced budget. This is why a government debt of over$35 trillion freaks out the folks on Capitol Hill. But MMT says we've got this all messed up.

9:00The government is not like a household. and the only way you could compare your household to the government is if you happen to have a money tree in your backyard. Under MMT thinking, the government should just flip the switch on the money printer to on and fund everything. And all that debt? MMT doesn't believe in that either. Every dollar of debt the US government has is a dollar they spent and didn't tax back from you. It's actually a credit on your side, which kinda, yeah, it is. Here's where things get tricky. Imagine if the government went too crazy with that money printer, because an irresponsible government could just keep printing money.

9:42Need a palace for the president? No big deal. Print more money. But as we've already covered, this is where the cautionary tale of hyperinflation comes in. Hyperinflation is totally jacked up inflation. It's when prices skyrocket by more than 50 % in a single month. That exact scenario has caused problems with hyperinflation around the world. Germany, Ecuador, Zimbabwe have all suffered from hyperinflation as a result of reckless governments going crazy with the money printer. MMT doesn't say hyperinflation won't happen. MMT agrees that printing money leads to inflation. MMT also doesn't say hyperinflation, no biggie.

10:22MMT agrees that hyperinflation is a problem. The real difference between MMT and historic economic thought is that historic economic thought basically says that the government should not make money when it needs it. It should borrow money and then deal with the debt problem. MMT says the government should print money whenever it needs it and then deal with the inflation problem. No train of thought is problem free. It's more a matter of choosing the lesser of two evils. For today's tip, you can take straight to the bank. If you're worried about inflation taking a bite out of your retirement savings, make sure that you hedge your portfolio with holdings that thrive in inflationary environments.

11:05Gold, for example, is priced in U.S. dollars. So that means that during inflationary periods, gold tends to increase in value to help you keep up even when things get more pricey. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content.

11:45And And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.