I hear on the news that the government is printing money to help pay for their spending. Why can’t they just print enough money to pay off all the debt? Maybe they could give all of us some too! That would fix everything, right?
Two friends are hungry one Friday night. They decide to have pizza delivered. Uncle Ben’s Pizza normally charges $15.95 for a large, 20-inch pepperoni pizza with 10 slices. They look in the paper for coupons. If they order a pizza with the coupon and ask for the “Bernanke Special,” they’ll get a large, 20-inch pepperoni pizza that has 20 slices for $15.95! Being the smart fellows that they are, they order the Bernanke Special. They get twice as many slices, right?
The money supply of the country is difficult to understand. To make it simple and understandable, I like to compare it to a pizza. The value or purchasing power of a dollar is not fixed. It changes due to many things. The one thing that has the biggest effect is how many of them there are, dollars that is. Think of our entire economy as a 20-inch pizza and the slices in the pizza as dollars. If you slice it 4 ways, each slice (dollar) is 25% of the pizza. If it is slice it 8 ways, the number of slices are doubled, but each one is only 12.5% of the pizza. Each slice is half as big as before. The size of the pizza has not changed, only the number of slices. Since the pizza is not bigger, the slices MUST be smaller. If you want more slices that are the same size, you need to make a bigger pizza.
Back to the dollar. Since our economy is not growing, our pizza is the same size. The government has just taken out the cutter and doubled the number of slices. You can look at the size of your pizza slice and see that you got ripped, it is smaller. That dollar bill looks the same though. How can you know that you are getting shorted? Buy something with it- a gallon of gas, milk, etc. It is now taking more dollars to buy the same things today versus a year ago. This is called inflation and it is only getting started.
I like to collect old money. Every once in a while I come across an old dollar bill at the bank. Recently, I received a 1934 One-Dollar Silver Certificate in change. It looks almost like a regular dollar except the seal is blue instead of green. On the front, it tells you that you can trade in the dollar bill for a silver dollar. Unfortunately, the government will no longer give you a silver dollar in exchange for this bill. As I am writing this, the value of one ounce of silver is just under $50.00. A silver dollar has one ounce of silver in it. Back in 1934, a silver dollar was worth one dollar. Today a silver dollar is worth over $50.00. How many slices do you want in your pizza?
This is why the United States cannot print money to get us out of the mess the politicians have put us in…