How does the U.S. “export” its inflation to other countries?


Question/Comment: How does the U.S. “export” its inflation to other countries? And a second question: Frequently pundits say the U.S. can and does print money to achieve some economic or financial goal. However, my economics professor says the government does not print money except to replace worn-out money. In my opinion, the government can (and does) increase the money supply, not by printing money, but by using various tools the Federal Reserve has at its disposal. Can you clarify this issue with specific detail?

Paul Solman: What people usually mean when they say the U.S. “exports” its inflation is that we’re flooding the world with dollars. To the extent the dollars are held as reserves by other countries (e.g., China, Japan) those countries are holding assets that are worth less, as the dollar drops in value. Thus their monetary wealth is diminishing with ours (i.e., inflation). It seems to me an iffy argument, however, because as the dollar drops, U.S. exports become cheaper and foreign currencies stronger.

That’s the opposite of inflation. So the U.S. could be said to be exporting inflation and deflation at the same time. As to “printing” money, the term is used both literally (as by your professor) and figuratively, as by you. People mean that the government, via the Fed, creates money when they say it “prints” it. What are the mechanics of the Fed creating money? It buys Treasury bonds (and lately, all sorts of other loans) from banks (and lately, investment banks, too) and deposits “Federal reserves” in their accounts. Those reserves are money — deposits on the basis of which banks can lend.