Anyone who has ever been caught printing counterfeit money knows how serious the Government is about preventing this sort of crime. Yet the average consumer does not seem to understand why it is unwise for the government to just print enough money to pay its bills. It comes down to something known as the money supply.
The money supply is the total amount of cash available within the economy at any given time. This includes cash left in reserve by banks and other institutions. The Federal Reserve controls money supply and, through it, certain aspects of the economy. They can directly affect inflation and consumer prices by manipulating money supply.
So why should the Government not just print more money to pay the bills? Consider cash in terms of value. As you know, the value of any object goes up in proportion to the difficulty in obtaining it. That is why diamonds and precious metals cost so much. If you and I could go pick them up off the ground by the truckload, they would be without value. Cash works the same way. The more cash there is in the system, the less valuable it is.
When the value of cash goes down, more of it is required in order to make purchases. If the Government were to simply print enough money to pay all of its bills, inflation would skyrocket out of control. Rather than do that, the Government prefers a slower approach known as ‘quantitative easing’. This policy of printing money gradually increases the money supply, thereby heading off massive inflation. However, money loses value nonetheless. The effects of such quantitative easing include low interest rates on savings accounts, low returns on bonds, and an unnaturally stifled stock market.
Manipulating the money supply has very direct impact on the national economy. The Federal Reserve has to be very careful at all times with its monetary policy as a result. That makes the money supply a very fluid thing that the Fed has to continually monitor and adjust.