Both seem to add more money into the market. How come printing money causes hyperinflation, but borrowing money from foreign countries (thus injecting more money into the market) doesn’t?
How is borrowing money from foreign countries any different from printing money?
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#1 by Bored Goblin on January 27th, 2011
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no, the money that they lend us is the same money that we paid them for in exchange for imports.
#2 by Billy Bob on January 27th, 2011
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both put us more into debt, but one does not create any new money.
watch the first 30 min of this movie to better understand printing money and debt
http://video.google.com/videoplay?docid=7065205277695921912#
also to better understand modern western banking practices watch this
http://www.google.com/search?q=money+masters&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a
#3 by Alvie on January 27th, 2011
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Borrowing money from foreign countries doesn’t increase the total amount of money in circulation. Whereas printing money and spending it in the economy increases the total amount of money in circulation.
USA for example borrows US dollars from foreign countries. And these US dollars foreigners bring to USA without any kind of money printing.
Foreigners sell more stuff than they buy in USA. And this leaves them with extra US dollars. And instead of accumulating these US dollars under their mattresses, foreigners bring their US dollars back to USA and buy US Treasury bonds. Which transfers the US dollars foreigners have to the US government.
The US government spends this money on salaries of government workers and various other things. Which transfers these US dollars back into the private economy.
People in the private economy then spend these US dollars on imports from foreign countries. And this again leaves foreigners with extra US dollars. Which they bring back to USA.
The money circulates through the economy like this without any increase in the total amount. And that’s why there is no hyperinflation when the US government borrows money instead of printing it.
In borrowing money, the only thing that increases is the amount of debt the US government owes to foreigners. Which is the amount of US Treasury bonds. While the amount of money in circulation remains the same.
But not all borrowing is like this. Within the US economy, banks loan money through the so called Fractional Reserve Banking. Where banks are allowed to loan out many times more money than they have in reserve from their depositors. And this results in temporary printing of money and temporary inflation of the money supply. And it’s temporary because when borrowers repay their debts to the banks. Then banks can record only the interest payments as their profit. And the extra money that was created earlier through fractional reserve banking disappears into thin air according to banking rules.
http://en.wikipedia.org/wiki/Fractional-reserve_banking