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Ever watched the Sunday news with the talking heads going on and on about how the global economy is entering ANOTHER recession or the fact that your government is in debt and wondered to yourself, who could the government owe money to, and why can’t they solve this problem by printing more money? I mean, the solution seems pretty straightforward, right?
While this might seem like the most obvious solution, this strategy's implications could do more harm than good. Why? One word, inflation.
It all simply goes back to the basics of supply and demand. Say the government would increase the supply and introduce an additional $20 million into the economy by buying treasury bonds, company bonds or borrowing from the world bank, that wouldn’t magically conjure $20 million worth of goods and services.
This action would give the consumers more money in their hands, thus increasing their purchasing power and the ability to buy more goods and services. Seems like a good thing right? It isn’t! An increase in consumer purchasing power would lead to an increase in demand that cannot be met. With this imbalance in supply and demand, suppliers are open to charging whatever they wish to for their products, causing prices to skyrocket by millions of percentage points, thus leading to a phenomenon called hyperinflation.
Once the prices for everyday goods like bread or soap increase multifold, these numbers cease to function as they are supposed to. This means that even though there is extra money being pumped into the economy, there is no use for it since you would have to spend 10000x more to purchase things, causing a devaluation of the currency (it is as simple as it sounds). Devalued currency stops holding its value, and people even refuse to accept it as a form of payment!
Hyperinflation through the years:
We’ve seen it happen many times throughout history. In the 1920s, inflation was so bad in Germany that its currency became worthless. It was used as a toy by children to wallpaper people's houses and make kites! Towards the end of 1923, you needed so much money to pay for even the most essential things that people had to carry it around in wheelbarrows.
But how did it get so bad? Because Weimar, Germany resorted to printing more money to deal with its inflation problems in 1922, leading to hyperinflation and a collapse of their economy.
Similarly, in Venezuela in 2018, a 5-pound chicken carried a price tag of 14.6 million bolivars, approximately equal to $2. Meanwhile, in Zimbabwe in 2008, teachers earned trillions of dollars per month, but the cost of a single loaf of bread amounted to 300 billion.
An overreliance on printing money to finance government expenditures won’t solve the public debt problem but will worsen it. As the money supply increases, the real value of the existing national debt decreases making it easier for governments to service the debts that they have to pay off.
However, this can create a dangerous cycle where the government continues to print even more money to take care of larger burdens, while continuing to increase the national debt and simultaneously putting the economy in a vicious spiral of inflation and economic instability. This approach may provide a temporary solution, but it merely shifts the inflation burden onto future generations.
While printing money may seem like an obvious quick fix, it is pretty clear that the negative consequences outweigh any perceived benefits. Hyperinflation, currency devaluation, market distortion, and a mounting debt burden are all inevitable outcomes of unchecked money printing. The only viable solution is for governments to adopt responsible fiscal policies and sustainable economic strategies that ensure long-term stability.
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