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Poster: rekrunner
Subject: RE: Federal loan payments - who do they go to? (please dont delete!)
Body:
The problem with your scenarios is you want to link a federal loan and national debt to the "fed" printing money. The debt and the money supply are independent things.

First, despite the official sounding name, the Federal Reserve is not really a government institution, but some kind of quasi-mix of private and public institutions which only partially answers to the government. I'm not sure the "fed" prints money either -- the "fed" decides monetary policy, but isn't money printed by the Dept. of Treasury? The "fed" is an independent entity created by an Act of Congress, while the Dept. of Treasury is an "executive" agency of the president. Maybe I've oversimplified things, but the "fed" is not the government.

Second, your federal loan, or any other national debt is just a promise to pay something back later. These promises take many different forms. There is no new money necessarily created with a promise. Any present money comes from previous tax revenues, or from the buyer of bonds, T-bills, or other obligations, or from the bank who actually finances the loan, with a promise of some kind of return. The future money to pay off this loan, debt, or obligation, will be financed by future tax revenues, a future buyer of bonds, or from a future loan. At no time during this process has the money supply necessarily increased or decreased. All that has happened is an exchange of promises, and an exchange of existing money, hopefully followed by a future exchange of future money.

Independently, the government (and/or the "fed") could decide to print new money to pay off the national debt, but such policy decisions need to be taken carefully to avoid excessive inflation and devaluation of currency. The real way out of recessions/depressions is a genuine growth in productivity, usually measured by things like GDP. Monetary policy can help stimulate or accelerate this growth in the short term, but not the long term.

student wrote:

I guess my more direct question is this:

The national debt is some astronomical number, so let's simplify it to 100. This money was "printed" by the fed. The existing money supply before we went into debt was 100, so now it's $200. Let's also assume there are only 10 people in the US. Everyone makes $20/year and is taxed $2. They then have $18 for living expenses.

Once we're out of the recession/depression/call it what you will, we start paying off the debt by generating a tax surplus. So all 10 people are taxed an extra $10 ($100 total dollars) to pay off the debt.

Now we're out of debt, but there's only half as much money, so either 50% of people lose their jobs or everyone gets a 50% pay cut. If the population doubles, everyone gets another 50% pay cut. So it seems we need to keep printing money and going into debt, no?

How can the fed increase the money supply in order to keep up with growing population and productivity without going into debt? I guess the storing of gold to back the dollars would make it possible, but we stopped doing that a long time ago.

The more questions I ask, the less I understand.
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