Why do governments borrow money instead of printing it?
"Governments borrowing money doesn't create new money. When banks ""borrow"" money (i.e. take deposits), it does effectively create money because the depositor expects to be able to get the money back at any time, but the bank assumes that most won't actually do this and lends out most of the money to other people. If everyone did actually ask for their money back at once, the illusion of the extra money created by this process would collapse, and the bank would go bust. In contrast when governments borrow money, the loan isn't repayable on demand, it has a fixed maturity and the money is only repaid at the end of that period (plus interest at defined points during the period). So holders of government debt don't have money they can spend (they can turn it into money they can spend but only by finding someone else to buy it). So government debt doesn't create inflation in itself. If they printed money, then they'd be devaluing the money of everyone who had saved or invested, whereas if they borrow money and use taxes to repay it, the burden falls more evenly across the economy and doesn't disproportionately penalise certain sets of people." “Why do governments borrow money instead of printing it? (When printing money, one doesn't need to pay interest).”  Good question.  Numerous leading economists, including a couple of economics Nobel Laureates have asked the same question and concluded that borrowing can be dispensed with. First, Milton Freidman set out a monetary system in a paper in the American Economic Review which involved no government borrowing, and govt just printed money (in a responsible fashion of course) as and when needed.  See: http://www.jstor.org/pss/1810624 A second Nobel Laureate with similar views was William Vickrey. A third economist with similar views (of Keynes’ era) was Abba Lerner. Keynes said of Lerner, “Lerner's argument is impeccable, but heaven help anyone who tries to put it across to the plain man at this stage of the evolution of our ideas”. "Yes - Simply put, printing money is called ""monetizing the debt"" and would result in some nasty inflation. It's a no-no as it quickly devalues the currency and makes it far more difficult to borrow in the future, an entire generation will remember getting burned by it. If, say, Canada's currency were suddenly worth half as much and you received half your investment back in US dollars (e.g. you paid US$10,000, but now have US$5000) would you ever trust them again?  The economy is far more complex than one can discuss here, but the fractional reserve system is the next creator of money, although it's not unlimited, the reserve requirement throttles it back. The demand for loans is impacted both by the rate itself and the bank's willingness to lend.  The housing bubble had multiple causes. In a sense Tucson is right. Anything we do to make houses more affordable can cause house price inflation. But - the over the top underwriting had more impact in my opinion. People lost sight of good lending practices. The option rate interest only ARMs were financial time bombs." One important answer is still missing: governments may not be able to do print money because of international agreements. This is in fact a very important reason: it applies to the entire Eurozone.  (I admit that many Eurozone countries also not allowed to borrow as much as they do now, but somehow that's considered a far lesser sin). "If the government prints money recklessly and causes inflation, people will come to expect inflation, and the value of the currency will plummet, and you'll end up like Zimbabwe where a trillion dollars won't buy a loaf of bread.  If the government actually pays people for the money they borrow, they don't have this problem - and as it turns out, the US government can get pretty good rates on borrowing in general, in part because they're extraordinarily good about paying them back. (Also, inflation expectations are low, so people will accept 1-2% interest rates. If you expected inflation of 10%, you'd see people demanding something more like 12% interest rates.) (The downside of too much of this sort of borrowing is that it ""crowds out"" other borrowing, which may harm the economy. Who would lend money to / invest in a small business, if the government is paying good money and there's almost no risk at all?) Now, inflation can come into play afterward, if the Fed decides it needs to maintain ""easy money"" policies to stimulate the economy (because taxes are too high because we're paying off the debt, or because we've crowded out smaller borrowers, or something). -- In general, you can count on the the principle that if you, as the government, try to play too many games with people's money... well, people aren't stupid; they will eventually catch on, and adjust their behavior to compensate, and then you're right back where you started, but with less trust." I believe there are two ways new money is created: My favorite description of this (money creation) comes from Chris Martenson: the video is here on Youtube. And yes, I believe both can create inflation. In fact this is what happened in the US between 2004 and 2007: increasing loans to households to buy houses created an inflation of home prices. The Government doesn't borrow money. It in fact simply prints it. The bond market is used for an advanced way of controlling the demand for this printed money. Think about it logically. Take 2011 for example. The Govt spent $1.7 trillion more than it took in. This is real money that get's credited in to people's bank accounts to purchase real goods and services. Now who purchases the majority of treasuries? The Primary Dealers. What are the Primary Dealers? They are banks. Where do banks get their money? From us.  So now put two and two together. When the Govt spends $1.7 trillion and credits our bank accounts, the banking system has $1.7 trillion more. Then that money flows in to pension funds, gets spent in to corporation who then send that money to China for cheap products... and eventually the money spent purchases up Govt securities for investments. We had to physically give China 1 trillion dollars for them to be able to purchase 1 trillion dollars in securities. So it makes sense if you think about how the math works in the real world. The government could actually do either one to expand the money supply as necessary to keep up with rising productivity / an increased labor supply.  The question is merely political. In the case of the US, printing money involves convincing politicians to spend it.  While we currently run a deficit, there is a large lobby within the US who are incredibly anti-deficit, and are fighting against this for no good reason.  If the money supply were left in their hands, we would end up with a shrinking money supply and rapid deflation. On the other hand, the Fed can simply bypass the politicians, and control the money supply directly by issuing bonds.  It's easier for them, they don't have to explain it to voters (only to economists), and it gives them more direct control without any messy political considerations like which programs to expand or cut. My own simple answer is that it will affect and reduce productivity (e.g. Zimbabwe). it will also cause inflation which mean that no one will want to work for production again. "My answer is that when confronted with the obvious, the most common human reaction is to seek reasons for it, because things have to be right. They have to have a reason. We don't like it when things suck.  So when finding out that you are being ripped off every day of your life, your reaction is ""There must be a logical reason that perfectly explain why this is. After all, the world is fair, governments are working in our best interest and if they do it this way, they must have a very good reason for it."" Sorry, but that not the case. You have the facts. You are just not looking at them. Economics, as a subject, is the proper management of resources and production. Now, forget the fancy theories, the elaborate nonsense about stocks and bonds and currencies and pay attention to the actual situation. On our planet, most people earn $2,000 per year. Clean water is not available for a very sizable percent of the world's population. Admittedly, 90% of the world's wealth is concentrated in the hands of the most wealthy 10%. A Chinese engineer earns a fraction of what a similarly qualified engineer earns in the States. Most people, even in rich countries, have a negative net value. They have mortgages that run for a third of their lifetimes, credit card debts, loans... do the balance. Most people are broke. Does this strike you as the logical result of a fair and balanced economic system?  Does this look like a random happenstance?  The dominant theory is ""It just happened, it's nobody's fault and nobody designed it that way and to think otherwise is very bad because it makes you a conspiracy theorist, and conspiracy theorists are nuts. You are not nuts are you?"" Look at the facts already in your possession. It didn't just happen.  The system is rigged. When a suit typing a few numbers in a computer can make more money in 5 minutes than an average Joe can make in 100 lifetimes of honest, productive work, you don't have a fair economic system, you have a scam machine.  When you look at a system as broken as the one we have, you shouldn't be asking yourself ""what makes this system right?"" What you should be asking yourself is more along the lines of ""Why is it broken? Who benefits? Why did congress turn its monetary policy over to the Federal reserve (a group of unelected and unaccountable individuals with strong ties in the banking industry) and does not even bother to conduct audits to know how your money is actually managed? This brilliant movie, Money as debt, points to a number of outrageous bugs in our economic system. Now, you can dream up reasons why the system should be the way it is and why it is an acceptable system. Or you can look at the fact and realize that there is NO JUSTIFICATION for an economic system that perform as badly as it does.  Back to basics. Money is supposed to represent production. It's in every basic textbook on the subject of economics. So, what should money creation be based on? Debt? No. Gold? No. Randomly printed by the government when they feel like it? No (although this could actually be better than the 2 previous suggestions) Money is supposed to represent production. Index money on production and you have a sound system. Why isn't it done that way? Why do you think that is?"
That's effectively borrowing on margin from the government. You too can borrow on margin, just not from the government.  It is true that the government perverts the finance system through. I would imagine it would be very hard to play basketball too, if the ref didn't play basketball. "Sovereign states borrow money explicitly in a two primary ways: A sovereign cannot be compelled to repay debt, and there isn't a judicial process like bankruptcy to erase debt. When sovereigns default, they negotiate new terms with creditors and pay back some fraction of the actual debt owed.  They can also print money to repay debt, which has other nasty consequences. But, while a state cannot be compelled to repay a debt, creditors cannot be compelled to loan money to the state either! Any enterprise of sufficient size needs access to capital via loans to meet daily obligations in anticipation of revenue -- even when times are good. Defaulting makes borrowing impossible or expensive, and is avoided. Regarding using your military to avoid repaying debt... remember what Napoleon said: ""An army travels on its stomach"". Military campaigns are expensive... no borrowing ability means the soldiers don't get paid and the food, fuel and ammo don't get delivered. Smaller countries have other risks as well. Many nations are essentially forced to use US Dollars as a reserve currency, or are forced by the market to borrow money in a foreign currency. This creates a situation where any risk of non-payment results in a deep devaluation of the local currency. When your debt is denominated in dollars, these shifts can dramatically increase your debt obligations from a local currency point of view. You also run the risk that a larger or richer company will park warships in your harbor and seize assets as payment -- the US and Britain engaged in this several times during the 19th and 20th centuries. In general, not paying the bills has a cascading effect. Bad situations get worse, and they do so quickly." As long as we remember that debt is the only option when the government has to borrow their money at interest or take it from taxes. When taxes don't cut it, we borrow. Ever wondered why the government doesn't just spend money into the economy instead of borrowing at interest? "This might not map well, because personal finance is not the global economy; but let's start by talking about this in terms of the cost of a loan vs the gain of an investment.   If you can buy a house with a mortgage at 3%, but make 7% on average in the stock market... You should take as *looong* as possible to pay that off, and invest every penny you can spare in the markets.  Heck, if you can take on even *more* debt at 3%, you should still do the same.  Now imagine you have the power to literally print money, *but*, doing so is effectively a form of ""loan"" to yourself.  We call the ""interest"" on that loan ""inflation"", and it comes out to roughly 2%, basically the same rate that US treasuries pay (they aren't strictly locked, but they rarely drift far apart).  So, if you can print money at 1%, you should rationally print as much money as you possibly can to buy US treasuries at 2+%.  But someone has to *take* that money off your hands - Pallets of money siting in a warehouse aren't worth any more than the paper they're made of.  There we get into trade imbalances... Whether printing money costs you 0.1% or 10% or 1000% per year depends on whether your country is, on average, making or losing money on international trade (I'm glossing over a hell of a lot there, as full disclosure), and by how much.  If you're printing money as fast as you can just to buy food to stay alive with zero exports, you're screwed; if your country exports $10 to the US (or equivalents) for every $1 you import, the rest of that is essentially ""invested"" in USD, in that you didn't need to print it yourself just to feed your people." "The Federal Reserve is not the only way that money can be ""printed."" Every bank does fractional reserve banking, thereby increasing the money supply every time they make a new loan. There's a number called the reserve requirement which limits how much money each bank can create. Lowering the reserve requirement allows banks to create more money. Raising it will destroy money. But banks can also destroy money by calling in loans or being less willing to make new loans.  So when you look at the number of banks in the US, and the number of loans they all have, it's impossible to figure out exactly how much the money supply is expanding or contracting." "Gold is not debt, ""money"" is debt (whatever it is made of).  In the example above, everything could have been exactly the same, except using certificates written on sharks instead of on paper.   Now, sharks have value, paper has value, and gold has value. When you print money, the stuff you make it out of has some utility separate from its use as currency. But when you are using it as currency (regardless of what it is made from), it is a marker for debt.   You go to work for an hour, your boss gives you a marker that you can trade for a cheeseburger or some gasoline or a ferret or cantaloupes, or whatever you want. That marker is an IOU for the work you did. You give it to the cantaloupe store, and it becomes an IOU for the value of one cantaloupe. They give it to the store employees or the cantaloupe-grower or whatever, and so on.   It doesn't matter what that marker is made out of, its function is the same. If it were gold, you could melt it down and make a ring out of it. If it's paper, you could use it as a bookmark or a shopping list or to blow your nose, if it's a shark you scare people with it in the pool.  N.B., this is totally separate from the question of whether we should be using gold as a currency, which has to do with the fact that the gold supply is a lot more stable than the paper supply, and whether being able to easily print more money on demand is a good thing or a bad thing." "Debt can be denominated either in a currency the country controls or a currency the country doesn't control. If the debt is denominated in a currency the country controls then they have the option of ""printing their way out of it"". That option doesn't come for free, it will devalue their currency on the global market and hurt savers in their country but it is an option. If the debt is denominated in a currency the country does not control then they don't have that option. As I understand it the US debt is in the first category. It's denominated in US dollars so the US government could if they so wished print their way out of it. On the other hand greece's debt is denominated in euros putting them at the mercy of european bankers." The debt is absolutely real. China loans money to US via buying the US treasury bonds. The bond is essentially a promise to pay back the money with interest, just like a loan. As you point out, the US can print money. If this were to happen, then the USD that the owner of a treasury bond receives when the bond matures are worth less that than the USD used to purchase the bonds. There are lots of reasons why the US doesn't want to print lots of money, so the purchaser of the bond is probably confident it won't happen. If for some reason they think it is possible, then they will want to cover that risk by only purchasing bonds that have a higher interest rate. The higher interest offsets the risk of the USD being worth less. Of course, there are lots more details, e.g., the bonds themselves are bought and sold before maturity, but this is the basic idea. Indirect exchange (the common units of which are called 'money') is not debt (though the commodity of indirect exchange may be debt). Physical gold is not debt (it is mined, not conjured into existence from someone's promise of future goods). Gold-backed paper currency is gold debt.  Indirect exchange is an extension of barter, not a replacement. The advantage of indirect exchange over direct exchange is that it solves the coincident of wants problem. (Alice may want a telescope, but Charlie doesn't want 500 apples for it. Alice finds out that Charlie would trade the telescope for 1 unit of gold. Alice then finds Bob who is willing to trade 1 unit of gold for 500 apples. Alice then trades with Bob and then trades with Charlie to get what she wants.) Up until 1913, the printing press was at the US treasury under the jursidiction of Congress. Congress needs to take back the printing press and perform their constitutional duties as described.   Right now, our government pays interest to borrow in its own currency. If the printing press was at the treasury, that wouldn't happen. "Hah!  In so far as the financial sector isn't making money off the government, then I would say it is truly ""financed through the financial sector"".  The financial sector doesn't operate at a loss, which is what you are suggesting here.  They aren't paying the government to have roads and power and plumbing and water, etc.    The financial sector is paying because they make more money back.  You want to admit who is paying to have roads and water and power and plumbing, etc?  Every person who gets a paycheck or owns a house is.  Not big money.  Ordinary people.  Taxes and Tariffs, and printing money pays for all of this.  We, the tax payer, aren't seeing a financial reimbursement for our expenses on these projects.  But Big Money is.  Our reimbursement is:  Roads, Power, plumbing, Police, Fire Departments.  Which means we are the consumers buying products.  Big Money is the middle man making bucks off the system.  Perhaps Big Money is necessary, but now it is out of control, and needs to be held accountable." "Its definitely not a stupid question. The average American has absolutely no idea how this process works. I know this might be annoying, but I'm answering without 100% certainty.   The Fed would increase the money supply by buying back government bonds. This increased demand for bonds would raise their price and therefore lower the interest return that they deliver. Since U.S. treasury bonds are considered to be the very safest possible investment, their rate is the ""risk free"" rate upon which all other rates are based. So if the government buys billions of these bonds, that much money ends up in the hands of whoever sold them. These sellers are the large financial organizations that hold all of our money (banks and large investment vehicles). Now, since bond rates are lower, they have an incentive to put that money somewhere else. It goes into stocks and investment in business ventures.   I'm less certain about how this turns into inflation that consumers will recognize. The short answer is that there is only a finite number of goods and services for us to buy. If the amount of money increases and there are still the same number of goods and services, the prices will increase slightly.   Your question about printing money to pay off debts is too complex for me to answer. I know that the inflation dynamic does play a role. It makes debts easier to pay off in the future than they seem right now. However, causing massive inflation to pay off debts brings a lot of other problems." Lots of countries *have* printed themselves away from debt. Not all inflation turns into a death spiral like Zimbabwe (or Weimar Germany) did, for that you need to have a really shitty economy that no-one believes in.  The problem with Japan right now is that they are trying to print their debt away, but as they do so, their currency *appreciates*. Gold medal for the first one who manages to explain that one. For now we can pay off our debt in United States dollars. If we lose our reserve currency status, we would have to pay it off with a different currency. If we continued printing money we would be debasing our currency against the new reserve currency, which would mean that after we took on too much debt we wouldn't really be able to pay our creditors back after exchanging our devalued currency for the new one on the international markets. We are lucky enough not to have to worry about this now. But I think OP was referring to all countries in these situations. Other countries don't have the luxury of just printing out massive amounts of money to pay off their debts. That is why I am saying that America has a very disillusioned view of reality when it comes to deficit spending. We wouldn't have that any more if the UN followed through with its suggestion to create a global reserve currency or reverted back to the gold standard (I don't think the second option is nearly as realistic but we never know). The answers provided so far as good and informative, but I just thought I'd add one small point... There are super-national organisations that commonly lend to governments, in particular those in the developing the world. The World Bank and IMF (International Monetary Fund) are the two primary ones. Also quite notably, the Greek economy was bailed out only this year by the EMF (European Monetary Fund) spearheaded by Germany - this is a rare occurrence however and was done mainly because Greece was a relatively developed country and others had an obligation to assist it as an EU member state.