The Issue of Printing More Money

A common question among the public is why governments choose not to print additional money to combat the problems of national debt. The answer is that printing extra money does not change the economic output at all, it simply causes inflation. Wealth is not created by printing more money; it is simply represented by it. When more money is printed and wealth has not increased, every banknote represents a smaller value. When money is recklessly printed by the government, inflation is created which can lead to hyperinflation.
Example of Inflation

Let’s say an economy produces $10 million worth of consumer goods, or 1 million shirts worth $10 each. If the government decided to double the supply of money, there would still be 1 million shirts but everyone would have more money so the demand for shirts would increase and drive prices up. Now, the 1 million shirts might be sold for $20 each so the economy is worth $20 million instead of $10 million but the number of consumer goods remains the same. Ultimately, this increase in GDP is just an illusion – there is more money but when prices increase, the economy and consumers are no better off.
Example of Hyperinflation

In Zimbabwe, the government was shutting down large areas of the economy, especially agriculture, by chasing farm owners away and substituting them for unskilled farmers. This created worry with consumers and bondholders as they believed that Zimbabwe’s currency value could not be supported by economic stability and future growth. Essentially, the demand for agriculture goods did not fall, but the supply dropped so prices increased dramatically.
The Consequences of Printing Money

There are situations where the printing of more money will cause inflation as shown in the examples above. In these cases, the price of consumer goods increased so wages and benefits also have to increase to account for inflation. There is also an increase in government spending and borrowers would now be subject to higher interest rates to purchase bonds. Thus, the underlying economic problems have not been solved and inflation has now become an issue. This is also what happened in Weimar, Germany in 1922. In order to meet the reparations of the Allies, more money was printed and hyperinflation was created. This hyperinflation caused the collapse of the economy.

However, printing more money does not always cause inflation. During a recession where deflation is present, it is possible for the government to increase the supply of money without creating inflation. This is possible because the supply of money not only depends on the amount of money, but also the circulation velocity. As an example, if there is a dramatic drop in transactions, or circulation velocity, then more money may need to be printed to avoid deflation. An example of deflation is the 2008 U.S. financial crisis when the government decided to print more money to pay for the debt. Hyperinflation was not present and many investors had not yet panicked. So while the money was supported by confidence, consumers chose to hold onto their money rather than purchasing goods. This has made demand and prices fall which has lead to deflation.

Eurozone Jobless Rate Stuck at Record High 11.3% in July

BRUSSELS -- The unemployment rate across the 17 countries that use the euro remained at a record high of 11.3 percent in July, official figures showed Friday, underscoring the huge task leaders face to restore confidence in the continent's economy.

The European Union's statistical agency, Eurostat, said 88,000 more people were without a job in July -- for a total of 18 million -- as governments and companies continued to trim payrolls to deal with problems of high debt and weak consumer spending.

The 11.3 percent unemployment rate, which is up 1.2 points from a year earlier, is the highest level since the euro was formed in 1999.

Joblessness increased in Spain and bailed-out Greece, both countries at the center of the European sovereign debt crisis which has thrown a cloud of doubt over the future of the single euro currency.

In Spain, the jobless figure rose by another 0.2 points to reach 25.1 percent, the highest in the eurozone. For Greece, the latest data available was for May, which saw a 0.5-point increase to 23.1 percent. A year earlier, it was 16.8 percent.

Youth unemployment was even worse. In Spain it stood at 52.9 percent for people under 25 and at 53.8 percent in Greece.

"Partners at all levels need to do all they can to avoid a lost generation which will be an economic and social disaster," said EU Employment Commissioner Laszlo Andor. He cautioned, however, that there was no "quick fix" to the problem.

Europe's economy has been hit by the combination of government savings measures -- cuts to public sector payrolls and benefits and tax hikes -- and the uncertainty that has caused huge volatility in financial markets. That uncertainty is keeping companies from hiring and investing and scaring households away from big purchases.

European leaders are preparing measures to boost confidence in government finances, hoping that greater stability will allow the economy to recover. But that task is proving long and arduous.

"We must not get used to these excruciatingly high levels of unemployment," said Hannes Swoboda, the president of the Socialist group at the European Parliament. "We have been witnessing constant, creeping increases in unemployment -- and especially youth unemployment -- for years now. Enough is enough."

The bottom of the eurozone's economic downturn though has yet to be reached, according to Ben May, European economist for Capital Economics.

With job measures "pointing to further falls in employment, the euro-zone unemployment rate looks set to rise further, suggesting that consumer spending will continue to fall over the coming quarters," May said.

In comparison with Europe's figures, Eurostat said unemployment in the corresponding month stood at 8.3 percent in the United States and 4.3 percent in Japan.

At the other end of the scale in the eurozone, Germany, the continent's biggest economy, had a rate of 5.5 percent. Its neighbor Austria had the lowest of all with 4.5 percent.

7 Ways to Encourage Your Kids to Develop Good Money Habits

A few weeks ago, I wrote about how low interest rates have made it difficult to convince any of my kids -- especially my 9-year-old daughter -- to open a savings account. While many of you agreed there's a problem, some of you believe I'm misrepresenting what savings accounts are for.

"S" Is for Savings ...

"You are right about [saving] being a good habit," wrote reader demosphnes, "however the point of placing money in a bank saving account is to build up a pile of cash to meet your needs. Investing is an entirely different manner and for that nobody should use a saving account at the bank."

Fair enough. I am more concerned about teaching my kids the act of saving than I am about finding the best rates, especially now that safety nets are under threat. Chances are, they're going to have to fund not only their own retirements, but also a large portion of their health care, insurance benefits, and more. They won't be able to do that if they don't know how to save.

... and "I" Is for Incentives

On the other hand, is it fair to tell a 9-year-old to save just because it's good for her? Isn't that just a little like telling her to eat her veggies? Incentives matter, and in saving and investing there's no better incentive than the prospect of a great return. Here are seven ideas for helping your kids earn more from putting their money to work:

1. Open a custodial brokerage account. History shows that investing in stocks beats investing in cash, especially over the long term. Small-scale broker ShareBuilder has an automated program that allows customers to invest weekly or monthly for just $4 per transaction. Custodial accounts are also available.

2. Create an eBay business. Entrepreneurs such as Microsoft's (MSFT) Bill Gates, Berkshire Hathaway's (BRK.A)(BRK.B) Warren Buffett, and Google's (GOOG) Larry Page and Sergey Brin are responsible for some of the world's largest fortunes. Why not have your child invest a small portion of her funds to create a small-scale eBay store or something similar? Whether it's selling off old dolls or toys or finding a market for homemade arts and crafts, she'll collect profits with each sale, and in the process learn business lessons that aren't easily taught in a classroom.

3. Become a bank. Banking basics are just as important as business basics. How about allowing your kids to lend to you at an attractive rate? They'll get a little extra cash and an important lesson on the compounding power of interest.

4. Start a matching program. If your kids aren't yet ready to dive into percentages and interest rates, try a matching program. Open a savings account for them and promise to match their contributions up to a certain level, just as the best 401(k) retirement savings programs do.

5. Sponsor a goal. You can also use goals to boost savings. Say your child wants a new bike. Agree to pay a portion of the cost if she'll earn and save the rest. SmartyPig takes a similar approach in encouraging adults to save, but with a social twist: Publicly commit to a savings goal and earn an above-average rate on your balance as peers watch and cheer you on.

6. Embrace the outlandish. Our 12-year-old son would go to Australia on his own if he could. He's too young for that -- obviously -- but what about solo flying lessons? We'd consider it if he saved most of the money needed. Tease the idea of access to the previously unattainable as a reason to sock away cash.

7. Use the Internet. Finally, consider creative alternatives. Kickstarter allows anyone to sponsor creative projects -- in subjects such as art, fashion, and technology -- some of which come with neat rewards. Agree to be your child's proxy for pledging support, but only if they first save the funds to make good.

Savings is a lifetime habit worth cultivating in our children. As parents, we've all got to do our part. What strategies are you using? What's worked? What hasn't? Please use the comments box below to weigh in.

Mortgages Tumble near Record Lows Again

Mortgage rates tumbled this week as investors awaited moves by the world's major central banks. The drop put rates near record lows again and ended a four-week streak of increases, giving borrowers some extra time to grab a low rate.
30 year fixed rate mortgage – 3 month trend
30 year fixed rate mortgage – 3 month trend
The benchmark 30-year fixed-rate mortgage fell to 3.8% from 3.91%, according to the Bankrate.com national survey of large lenders. The mortgages in this week's survey had an average total of 0.4 discount and origination points. One year ago, the mortgage index stood at 4.37%; four weeks ago, it was 3.77%.
The benchmark 15-year fixed-rate mortgage fell to 3.03% from 3.12%. The benchmark 5/1 adjustable-rate mortgage fell to 2.8% from 2.9%.
Weekly national mortgage survey
Results of Bankrate.com's Aug. 29, 2012, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
30-year fixed 15-year fixed 5-year ARM
This week's rate: 3.8% 3.03% 2.8%
Change from last week: -0.11 -0.09 -0.1
Monthly payment: $768.83 $1,141.84 $677.98
Change from last week: -$10.37 -$7.17 -$8.80
Big event this week may affect rates
Helping rates this week was speculation that Federal Reserve Chairman Ben Bernanke may announce plans for additional monetary stimulus at an annual conference scheduled for Friday in Jackson Hole, Wyo.
The rumors started after the Federal Open Market Committee's latest meeting minutes were released. In the minutes, some Fed members indicated they support additional stimulus, including additional bond purchases. Two years ago, the Fed announced its second bond-buying program, QE2, during this same annual summit.
Even if a supposed QE3 is not announced this week, Bernanke's speech may still affect the direction of mortgage rates in coming days, says Michael Becker, a mortgage banker at WCS Funding in Baltimore.
"We are in a strange market these days where statements from central bank heads move markets more than economic data," Becker says. "So it's hard to tell where rates are going, but if you're ready to lock, I'd say do it."
Rumors aside, it's unlikely Bernanke will announce additional help for the economy Friday, analysts say. That's partly because recent reports show the U.S. economy and the housing market have been improving -- slowly but surely. The improvements make it more challenging to persuade Fed members who are against additional stimulus that more help is needed.
What's good for the economy isn't good for rates
On Wednesday, the Commerce Department said economic growth in the second quarter of this year was better than expected. The country's gross domestic product, or GDP, which measures economic activity, grew at an annual rate of 1.7% in the second quarter. The government had previously estimated growth at 1.5%.
The Fed's Beige Book, released Wednesday, shows the economy expanded "gradually" in July and part of August.
"Retail activity, including auto sales, had increased since the last Beige Book report," the Fed says in the report.
Recent improvements in the housing market also may be seen as a sign that the economy may be ready to walk on its own feet and it doesn't need additional help from the Fed.
U.S. home prices posted a year-over-year increase in June for the first time in two years, according to the Standard & Poor's/Case-Shiller home price index report released this week. The closely watched index of 20 major metro areas shows home prices rose by 0.5% in June, compared to a year ago. This isn't isolated data. Several other recent reports that track home prices and home sales have shown consistent improvements in the housing sector.
"We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change. The market may have finally turned around," says David M. Blitzer, chairman of the index committee at S&P Dow Jones Indices.
Europe is your friend but not forever
But borrowers who want the superlow rates to last a little longer still have Europe's trouble on their side. Analysts say that until the debt crisis in Europe is resolved, rates in the United States will likely stay near the lows. That's because the crisis makes investors seek safer investments, such as U.S. Treasuries and mortgage bonds, and that generally results in lower mortgage rates.
Will the European debt crisis be solved anytime soon? Probably not, but since rumors move markets, rates may react to a European Central Bank meeting Sept. 6. Any announcements that make investors feel more confident about Europe's economy may hurt rates in the United States, Becker says.
"There's so much going on after Labor Day that anything could happen to rates,

Week Ahead: August Jobs and Other Economic Data

Lots of economic data is due next week, none more important than the August jobs report out on Friday. Markets are closed Monday for the Labor Day holiday.
A sharp move one way or the other for the unemployment rate could mean the difference between the Federal Reserve announcing a new round of economic stimulus at its September meeting in two weeks -- or not.
On Friday, Fed Chairman Ben Bernanke made it clear that sagging labor markets are a top priority for the Fed. In a much anticipated speech before other central bankers in Jackson Hole, Wyo., Bernanke said stubbornly high U.S. unemployment was a “grave concern.”
Should the August numbers disappoint by falling below expectations, it would put additional pressure on the Fed to announce another round of quantitative easing, the bond buying programs intended to add liquidity to stagnant financial markets.
A surprise to the upside could take the pressure off the Fed, allowing them to maintain the status quo of low-interest rates through late 2014. The July jobs data was marginally better than the four previous monthly labor reports, all of which disappointed.
Economists expect the August unemployment rate will likely hold steady at 8.3%.
Also on tap next week are August car and truck sales due Tuesday; payroll company ADP’s employment report on Thursday, which usually provides a fairly accurate preview for the government’s report later in the week, and data from the manufacturing sector on Tuesday with the release of the Institute of Supply Management Index, which surveys activity among 300 manufacturers.

DOJ's New Strategy: More Criminal Charges

The Department of Justice is shifting its sights to a new offensive in combating money laundering: bringing criminal charges against banks and other financial institutions for weak compliance systems that fail to catch illicit money flows.
Even while the department's money-laundering unit is wrapping up a series of blockbuster cases involving sanctions-busting transactions routed through some of Europe's biggest banks, it has set its sights on the next front.
While the sanctions cases involving Iran and other countries have largely dealt with historical conduct, part of the shift is to pursue ongoing misconduct.
The focus on compliance systems has traditionally been left to financial firms' direct regulators, including the Office of the Comptroller of the Currency, whose punishments usually amount to a strong slap on the wrist.
The DOJ has brought a handful of its own such cases, including one against Wachovia in 2010 in which authorities said the bank failed to maintain effective anti-money laundering controls and did not stop more than $100 million of Colombian and Mexican drug traffickers' money from being laundered through accounts at the bank.
The DOJ unit is now interested in ramping up the number of criminal cases it brings under the Bank Secrecy Act, or BSA, a law that requires financial institutions and their employees to take steps to combat money laundering.
"I think you are going to see more complex BSA cases against banks, I think you are going to see enforcement across the broader spectrum of financial institutions," said Jennifer Shasky Calvery, who heads the Department of Justice's Asset Forfeiture and Money Laundering Section.
The cases come with potentially hefty punishments, with financial penalties equal to the illicit funds moved and prison sentences between five and ten years for individuals.
Also part of the appeal is that BSA cases, including compliance-related charges, can capture a range of financial institutions, from commercial banks and credit unions, to broker-dealers and insurers, to casinos and pawnbrokers.
In June, the Department of Justice charged check-cashing businesses in Brooklyn and Los Angeles with failing to file certain transaction reports and failing to have an effective anti-money laundering program. The businesses were being used to move more than $50 million in money, some of which was potentially linked to healthcare fraud, the government said.
Besides being one of the first such cases against a financial institution that isn't a bank, it was also the first to indict individuals - the owners of the businesses - with failing to have an effective anti-money laundering program.
It is unclear whether the effort will produce marquee cases or those targeted at smaller entities, and individual charges are unlikely at larger institutions since responsibilities are often shared by multiple employees and departments.
But at least one big upcoming case, against HSBC, is expected to be based in part on the bank's weak compliance systems.
The U.K.-based bank set aside $700 million last month for anticipated U.S. fines that are expected to come from a years-long probe by the Department of Justice and other authorities.
A U.S. Senate report in July highlighted the allegations, finding that HSBC had let clients shift potentially illicit funds from countries such as Mexico, Iran, the Cayman Islands, Saudi Arabia and Syria.
One of the largest casino companies, Las Vegas Sands, run by magnate Sheldon Adelson, is also under investigation by the Department of Justice for potential violations of anti-money laundering laws, according to a source familiar with the matter.
Banks have in the past generally tailored their anti-money laundering efforts to meet the requirements of banking regulators. With the DOJ's shift in focus, banks may need to ensure they are not liable to criminal charges of money laundering that the department would try to establish in any case it pursued.
"Any responsible financial institution is going to have to assess its anti-money laundering program and make sure that it has not just enough resources and personnel to satisfy regulators but also to ward off any criminal investigative activity," Peter Djinis, a former regulatory policy official with the U.S. Treasury Department's Financial Crimes Enforcement Network, also known as FinCEN.
Djinis, who is now in private practice in Florida, said he hopes the department's intensified interest doesn't cause friction with regulators.
Notably, New York state bank regulator Benjamin Lawsky earlier this month aggravated federal authorities by breaking from negotiations to bring his own sensational sanctions case against British bank Standard Chartered, extracting a large settlement in the process.
"What we don't want to do is have a bidding contest between the criminal prosecutorial powers of law enforcement and the oversight and supervisory powers of the regulators," Djinis said.
NEW UNIT
In 2010 the Department of Justice created within the asset forfeiture section a specialized unit, money laundering and bank integrity, which it staffed with about 14 prosecutors who focus exclusively on financial institution cases.
The unit, which is also handling the sanctions and stripping-related cases including the one against Standard Chartered, is focused on fortifying the U.S. financial system against money laundering and illicit finance, Shasky Calvery said.
"The way we do that is by aggressively enforcing the Bank Secrecy Act," she said.
The term "stripping" refers to the practice of banks removing or masking information regarding transactions.
Shasky Calvery is leaving the Justice Department next month to head FinCEN, the U.S. Department of the Treasury's anti-money laundering unit.
Her deputy, Jai Ramaswamy, will serve as acting chief of the unit and said he planned to keep it on the same track.
Part of the shift in focus appears to be a greater interest in cases which show ongoing illegal conduct rather than going after banks and institutions that broke the law in the past but have not continued to do so.
The headline-grabbing cases involving allegations that some of the world's largest banks concealed Iran-linked transactions are related to historical conduct. The Standard Chartered case, for example, deals primarily with conduct that occurred before 2008.
The newer focus cases in contrast involve some more recent activity. The check cashing case, for example, involved conduct that lasted through June 2011, prosecutors said.
Earlier this month the Department of Justice charged what it described as a multi-million dollar money laundering conspiracy to help move drug money in Texas, and said the conduct had occurred through 2011.
Such cases also represent something of shift to charging so-called professional money-launderers, as opposed to adding money-laundering charges to an underlying drug or corruption case.
Another priority of the unit is examining potential misconduct in new types of technology such as mobile payments, Shasky Calvery said.

The Business of Fantasy Football

Fantasy football drafts for the 2012 season are underway in offices, college dorms and schools nationwide, as men and women of all ages gear up for this year’s highly-anticipated NFL season. The intense competition amongst friends, colleagues and strangers has grown into a lucrative business, generating profits in excess of $1 billion through cable deals, advertisements, draft guides, buy-in fees and various endorsements.
Fantasy football has been around since 1962, becoming more popular in the 1980s and 1990s before booming with the growth of the internet over the last 10 years. The soaring number of participants and growing profitability of fantasy football is leading some to say the industry is “recession-proof.”
“Our recent survey says we gained another 2 million players from last year,” said Paul Charchian, Fantasy Sports Trade Association President. “The numbers keep growing and it’s a pace we’ve been keeping up for years.”
A recent report from Fantasy Sports Trade Association estimates 75% of the 34 million fantasy sports participants will be fantasy football owners this year.
Fantasy football participants draft and manage a team of players throughout the NFL season. Each week, managers can shuffle their starting lineup and shake up rosters in attempt to form the strongest team for the week’s matchup. Hurt players will be benched and the week’s underperformers can be used as backups. Specific rules vary by league, but generally speaking each participant selects position players, a defensive team and one kicker.
While the average fantasy football participant is in their mid-30s, teenagers are fueling the industry’s recent growth.
“A lot of fantasy football’s growth is coming from the younger generation,” said Charchian. “Parents are playing with their kids. The growth is happening organically. We’re not targeting a specific demographic; rather it’s what families want to happen in their living rooms on Sundays.”
And fantasy football is changing the way fans watch the sport, prompting cable-TV providers to strike pricey deals. Specific programming such as NFL RedZone is significantly benefiting from the booming industry.
“[NFL RedZone] is crack for fantasy players,” said Charchian. “The NFL RedZone channel is specifically targeting us, the fantasy crowd. It’s a huge program.”
NFL RedZone airs on Sunday afternoons and alternates between the league’s games, showing plays only when teams go inside the 20-yard line.
Earlier this month, Cablevision reached an agreement to carry the NFL Network. SNL Kagan estimates the NFL Network charges a carriage fee of 81 cents per-subscriber, per-month, making it the fourth most expensive national cable channel.
And cable companies aren’t the only businesses looking to cash in on fantasy fans. Small businesses nationwide are profiting from participants quests to financially protect their prized rosters. FantasyDispute.com claims to resolve fantasy sports disagreements for $14.95. The firm pledges to keep the integrity of each fantasy league at the highest degree.
Other firms like Fantasy Sports Insurance (FSI) provide disability coverage on star players, financially protecting fantasy managers when players suffer “season changing” injuries. FSI vows to reimburse participants of all expenditures associated with fielding a fantasy team, and calculates its costs at a 10% rate of the insured value plus fees.
However, not all firms benefit from the hours spent fielding players and analyzing injuries. A report by Challenger, Gray & Christmas estimates the nation’s more than 22 million employed fantasy football participants may be costing employers up to $6.5 billion this year. The outplacement firm reached its figure by estimating each fantasy football manager will spend one hour at work every week on their teams during a 15-week season.
The NFL season will kickoff Wednesday, September 5.