Question

The Congressional Research Service estimates that at least \(\$ 45\) million of counterfeit U.S. \(\$ 100\) notes produced by the North Korean government are in circulation. a. Why do U.S. taxpayers lose because of North Korea's counterfeiting? b. As of December 2014 , the interest rate earned on one-year U.S. Treasury bills was \(0.13 \%\). At a \(0.13 \%\) rate of interest, what is the amount of money U.S. taxpayers are losing per year because of these \(\$ 45\) million in counterfeit notes?

Short answer

U.S. taxpayers lose because counterfeiting leads to a decrease in the value of genuine currency, causing inflation and reduced purchasing power. Additionally, the government's expenses in combating counterfeiting and safeguarding the financial system increase, ultimately burdening the taxpayers. b. How much money do U.S. taxpayers lose per year because of North Korea's 45 million in counterfeit notes, given the interest rate earned on one-year U.S. Treasury bills is 0.13%? U.S. taxpayers lose approximately $58,500 per year due to these counterfeit notes, as this is the potential interest they would have earned if the $45 million were genuine and invested in one-year U.S. Treasury bills.

Step-by-step solution

a: Explanation of the impact of counterfeit notes on the U.S. taxpayers

Counterfeiting has significant economic and financial consequences. When counterfeit notes are distributed in the economy, the value of the genuine currency decreases. This leads to inflation, as more money is chasing the same amount of goods and services. As a result, the purchasing power of real money held by U.S. taxpayers is reduced, causing them to lose wealth. Additionally, the cost of fighting counterfeit currency and the measures taken to safeguard the financial system result in higher expenses for the government, which are ultimately borne by U.S. taxpayers.

b: Calculation of the annual amount of money U.S. taxpayers are losing

In order to calculate the annual amount of money U.S. taxpayers are losing because of the counterfeit notes, we need to consider the opportunity cost of holding genuine currency that could have otherwise been invested in one-year U.S. Treasury bills at the given interest rate of \(0.13 \%\). First, let's find the total interest that would have been earned on these \(45\) million counterfeit notes if they were genuine and invested in one-year U.S. Treasury bills: Total Interest = Principal Amount * Interest Rate Total Interest = \(45,000,000 * 0.0013\) Now, let's calculate the total interest: Total Interest = \(45,000,000 * 0.0013 = 58,500\) U.S. taxpayers are losing approximately \(58,500\) per year due to these \(45\) million in counterfeit notes, as this is the amount they would have potentially earned if this money was invested in one-year U.S. Treasury bills.

Key concepts

Inflation Impact

Counterfeiting can cause inflation by increasing the amount of money in circulation. Here's how this works:

• More money in circulation often means more people purchasing goods and services.
• If the supply of these goods and services does not increase at the same pace as the money supply, prices will rise.

This rise in prices is what we know as inflation. Counterfeit money pretends to be real, so it adds to the money supply without an actual backing in value or production.
For the U.S. taxpayer, inflation impacts their everyday life. They may find that their money does not go as far as it used to. This means spending more for the same items they used to buy for less. Additionally, inflation erodes savings, diminishing the value of money over time.

Purchasing Power

Purchasing power refers to how much goods and services your money can buy. With counterfeit currency circulating, the purchasing power of legitimate money is diluted:

• As inflation occurs, the value of genuine currency decreases. This means that although you may have the same amount of money, it buys you less than it did before.
• In essence, $100 today might not buy the same basket of goods and services as it did ten years ago.

Counterfeiting reduces purchasing power because it artificially inflates the money supply. It creates more currency without an actual increase in the country's economic output, leading to a devaluation of currency. For taxpayers, this means they need more money each year to maintain the same standard of living.

Opportunity Cost

Opportunity cost is the benefit lost when choosing one alternative over another. In the context of counterfeit currency, it represents the financial opportunities missed out on by holding fake currency rather than investing real money:

• If the $45 million in counterfeit notes were instead genuine, they could be invested in secure avenues like U.S. Treasury bills.
• At an interest rate of 0.13%, taxpayers lose the chance to earn around $58,500 annually from these investments.

Opportunity cost here emphasizes the financial damage not merely by having counterfeit currency but by losing the returns that could have been earned from these channels. It's a reminder of the unseen cost counterfeit money imposes on the economy, highlighting the tangible and potential benefits forgone by responding to fraud.