Katsumoto:

Option 1
Government prints money and pays for essential services such as roads, electricty, education, etc.
The companies hired by the government go out and employ more workers
The employed workers will in turn have more money to pay for goods and services. Assuming that supply of goods and services remains constant, you will have more money chasing the same goods as a result of the increased supply of money in the economy. That is inflation. With investors aware that government is printing money, confidence is low and supply can sometimes decrease because no seller wants to sell goods knowing that the value of his/her holding will continue to go down.

Option 2
The same effect providing services and employment can be achieved through fiscal policies. In every country, there are individuals and corporations with spare capacity. These individuals and corporations have a few options when it comes to investing their excess funds. They can invest in equities, pay dividends, engage in share buy-backs, buy international assets, etc. The government through fiscal policies can encourage these individuals and corporations to invest in its economy buy lowering taxes, and interest rates for borrowing and other incentives. This is sometimes referred to as trickle down economics because when corporations and individuals invest in business enterprise, they employ workers, lease and buy assets which in turn boost the economy. For instance, Ireland boosted its economy (never mind the problems caused by Irish Banks) by levying a 12.5% corporation tax on business which led to investments by corporations such as Google, Microsoft, SAP, etc As the economy grows, demand and supply increase since sellers are always looking for markets to sell goods and services without losing the value of their holdings. With increased revenue from taxes, the government can pay for roads and other infrastructure without needing to print money needlessly.


So which option will you select?

3kay945:

what do you mean.?,  so even if the government borrow the money, is it not still going to give it out to contractors? or are you  saying millions of workers will benefit from this. so how does this cause inflations?

oncolor:

Your option 1 only happens when government gives out free money to all its citizens or majority of its citizens without any corresponding productivity. If govt instead prints this money and uses it to pay for developmental projects then the companies that provide these services go out and hire more workers, they have reduced unemployment, which in turn will give the workers in these companies more purchasing power allowing them to buy more goods which in turn will stimulate those companies producing the goods they are buying to produce more and expand their factories etc. I think it is actually a good thing because you are not just printing money and giving to citizens but developing basic services which would have a multiplier effect on the economy. Like 3kay945 pointed out, what happens when the UN or WORLD BANK or some other foreign donors doll out billions in aid for one project or the other?

Nn-a-Nn-a:

[color=#990000][/color][size=8pt][/size][font=Lucida Sans Unicode][/font]NOW I KNOW WHY NAIRA DEPRECIATED SO RAPIDLY DURING BABAGIDA REGIME. INCCESSANT CASH MINTING. IT IS COMMON KNOWLEDGE THAT NIGERIA CANNOT OR WILL NOT PRINT DOLLAR. SO YOU PRINT NAIRA AND USE IT TO BUY DOLLAR AND CONTINOUSLY NAIRA REDUCED AGAINST DOLLAR NEVER TO RISE TO FORMER GLORY. THANKS FOR THE WISE CONTRIBUTORS.

KenGali:

Why is it that we cannot just print money to grow our economy instead of the difficult path of increasing production?

Most of the answers I have seen on this forum are focused on secondary functions and uses of money such as stocks, import export, etc.

The answer lies in the fundamental definition and use of money. Economics will quickly use the word inflation without breaking it down.

But before explaining, I wish to point out that you can actually get away with printing small extra amounts of money, it is when you do it on a large scale that you have a problem.

Let me start by saying first that money itself is not a resource. (Many modern economics argue otherwise, I argued a lot about this with my Sec. Sch economics teacher and we could not agree).

Money is a representation of the actual resources we have. Without money (e.g cowrie shells as used in olden days) we will be stuck with the problem of trade by barter, and the attendant issues of finding someone who has want you want and wants what you have so that an exchange can take place. So say you have a goat and want a spoon, you find someone who wants a goat and has hanger, you still have a big problem. Even when you find someone who has a spoon and wants a goat, will you give him a whole goat for a single spoon? or would you want to kill your goat just to give him the leg for a spoon, the rest of the goat will soon spoil if not exchanged, or you have to eat the remaining goat meat for like a week when you prefer yam.

cecegorz:

^^^^
Well taken.
The question is still not yet answered.
How is the money injected from printing different from the ones brought in from IMF and world bank as loans.
If both has the same effect, as in triggering inflationary tendencies, why still go cap in hand.

kulutempa:

Thank you for your helpful contribution KenGali. It is quite clear from what you say that this is why more productive countries like Germany and America, have stronger currencies than countries like Nigeria and Ghana. It is also why our currency was much stronger in the 1960s because of our agricultural productivity and export of commodities like groundnuts and cocoa which fetched good prices on the world market. In the 1970s the naira was also strong because we were exporting crude oil whose price was skyrocketing due to the Arab oil embargo. We therefore had a trade surplus with other countries and a strong balance of trade. As soon as the oil price crashed in the 1980s the naira, not surprisingly crashed as well and its exchange rate relative to strong currencies like pound sterling and the American dollar, fell sharply. In a nutshell the value of your currency is directly related to your productivity and trade balance, and printing more of it without adding value to your economy is a recipe for economic disaster.

KenGali:

Hence using another object (Money) to represent each unit value of any type of resource allows us:
1. To be able to trade without having to find someone who wants what we have and have what we want
2. To be able to trade off a small part of a resource like a whole cow without having to loose the remaining value of the resource in the process.

Money is just a particular object accepted by all or compelled to by accepted by all through societal laws to serve as an intermediate form to which we can convert any resource in other to have a uniform medium of exchange and trade.
The total collection of money in circulation is therefore directly related or dependent on the amount of resources that is in existence within a society. But can be increased or decreased, usually by the Central Bank of a country.

We have a relative value we attach to different resources, a cow may be said to worth about 50 chickens or ten goats. Depending on the amount of money in circulation we can use say 10 cowries to represent a chicken in similar manner.

If a single individual should find or make more cowries, he might be able to cheat the system by buying goods with cowries that do not represent any resource he or she has. That is what money counterfeiters do.  But if the entire society decide to put more cowries in circulation, it will in no way increase the amount of chickens or cows or trees that the society has. What will happen is that since cowries are no longer as scarce as before, a chicken may now be exchanged for 15 cowries instead of 10. That is what you call an inflation viz a viz Inflation in the money value of the chicken.

In all my talk replace the cowry shells with square paper cuts signed by the king or rulers (Thats what paper money is).
Instead of going to the sea to find more cowry shells to put in circulation, you just have to print and cut more papers with special features so that counterfeiters cannot do same.

Note that resources can actually be created, but you need some resource to create more resources. In contrast to wealth creation by printing more money, there is a similar classical case in commercial banks. A commercial bank will collect your money (indirectly your resource) to safe keep for you and give you an ordinary paper to hold for your claims. When you go away, someone who wants to create more resources will come to the bank and explain this his or her wonderful business idea and the amount of production resources he needs and try to convince the bank to give him your resources and that of others, promising to have finished production at a certain time and return equal value of resources to the bank, and some extra called interest.

If the bank agrees they will allow such, if he is successful, the bank makes a profit and returns your resources whenever you ask for it back. But in this case, the money in circulation has not increased, but the resources have increased. The overall effect in the economy is that you have more resources and less money, so resources will exchange for less, like our earlier chicken may now be exchanged for only 8 cowries instead of ten.

When the banks over-do wealth creation and lend too many people whose production business collectively fail at the same time, you have a vaccum being represented by money in circulation. Such vaccuums must collapse, thats the famous financial crisis.

When you hound the banks too tightly that they do not lend money out, no extra resource will be created and only rich people will have enough money to create more resources and you know most rich people only like to enjoy their wealth.

Money in societies that have many more resources compared to the money they circulate (like US) will be considered to have more value than money from countries with less resources and equivalent amount of money in circulation. The specific number relating the two countries’ money is the exchange rate. Remember money is not a resource, unless you consider using it as elements in your new mosaic art work.



The funniest part of Nigerians understanding of money lies in the attitude of our leaders. When someone loots say two billion naira and sends it to swiss bank, what you have done is to give swiss people a blank authority to choose whatever resources they want from Nigeria, use it to create jobs and more resources for their people and pay back a pittance when you ask for your money back. The swiss bank will definitely lend the money out for swiss people to create more wealth, while our silly leader comes back to print more worthless money.

Meanwhile his grandson or grand daughter will in the next ten years lose a job or not even find one because the production firm or factory that could have employed them was never established or had to close down as the Swedes had already come around with the huge amount of our money the leader kept in their bank, they used it to collect the best of our groundnut, the best of our palm nuts, cocoa, crude oil. they will go back process and add value to them, comeback and sell to us at a price that will kill any competitive producer we have and ensure they have a future market for their products. they will then give back to our dear leader his money and take the profit. We remain non-industrialized, while they wax strong all because our leader studpidly made their cost of production unbeliveably low.

Katsumoto:

Your post is more about the uses of money and does not address the problems caused by an increase in the supply of money in the economy. What happens when the CBN prints more money?

KenGali:

Hence using another object (Money) to represent each unit value of any type of resource allows us:
1. To be able to trade without having to find someone who wants what we have and have what we want
2. To be able to trade off a small part of a resource like a whole cow without having to loose the remaining value of the resource in the process.

Money is just a particular object accepted by all or compelled to by accepted by all through societal laws to serve as an intermediate form to which we can convert any resource in other to have a uniform medium of exchange and trade.
The total collection of money in circulation is therefore directly related or dependent on the amount of resources that is in existence within a society. But can be increased or decreased, usually by the Central Bank of a country.

We have a relative value we attach to different resources, a cow may be said to worth about 50 chickens or ten goats. Depending on the amount of money in circulation we can use say 10 cowries to represent a chicken in similar manner.

If a single individual should find or make more cowries, he might be able to cheat the system by buying goods with cowries that do not represent any resource he or she has. That is what money counterfeiters do. But if the entire society decide to put more cowries in circulation, it will in no way increase the amount of chickens or cows or trees that the society has. What will happen is that since cowries are no longer as scarce as before, a chicken may now be exchanged for 15 cowries instead of 10. That is what you call an inflation viz a viz Inflation in the money value of the chicken.

In all my talk replace the cowry shells with square paper cuts signed by the king or rulers (Thats what paper money is).
Instead of going to the sea to find more cowry shells to put in circulation, you just have to print and cut more papers with special features so that counterfeiters cannot do same.

Note that resources can actually be created, but you need some resource to create more resources. In contrast to wealth creation by printing more money, there is a similar classical case in commercial banks. A commercial bank will collect your money (indirectly your resource) to safe keep for you and give you an ordinary paper to hold for your claims. When you go away, someone who wants to create more resources will come to the bank and explain this his or her wonderful business idea and the amount of production resources he needs and try to convince the bank to give him your resources and that of others, promising to have finished production at a certain time and return equal value of resources to the bank, and some extra called interest.

If the bank agrees they will allow such, if he is successful, the bank makes a profit and returns your resources whenever you ask for it back. But in this case, the money in circulation has not increased, but the resources have increased. The overall effect in the economy is that you have more resources and less money, so resources will exchange for less, like our earlier chicken may now be exchanged for only 8 cowries instead of ten.

When the banks over-do wealth creation and lend too many people whose production business collectively fail at the same time, you have a vaccum being represented by money in circulation. Such vaccuums must collapse, thats the famous financial crisis.

When you hound the banks too tightly that they do not lend money out, no extra resource will be created and only rich people will have enough money to create more resources and you know most rich people only like to enjoy their wealth.

Money in societies that have many more resources compared to the money they circulate (like US) will be considered to have more value than money from countries with less resources and equivalent amount of money in circulation. The specific number relating the two countries’ money is the exchange rate. Remember money is not a resource, unless you consider using it as elements in your new mosaic art work.



The funniest part of Nigerians understanding of money lies in the attitude of our leaders. When someone loots say two billion naira and sends it to swiss bank, what you have done is to give swiss people a blank authority to choose whatever resources they want from Nigeria, use it to create jobs and more resources for their people and pay back a pittance when you ask for your money back. The swiss bank will definitely lend the money out for swiss people to create more wealth, while our silly leader comes back to print more worthless money.

Meanwhile his grandson or grand daughter will in the next ten years lose a job or not even find one because the production firm or factory that could have employed them was never established or had to close down as the Swedes had already come around with the huge amount of our money the leader kept in their bank, they used it to collect the best of our groundnut, the best of our palm nuts, cocoa, crude oil. they will go back process and add value to them, comeback and sell to us at a price that will kill any competitive producer we have and ensure they have a future market for their products. they will then give back to our dear leader his money and take the profit. We remain non-industrialized, while they wax strong all because our leader studpidly made their cost of production unbeliveably low.

KenGali:


If a single individual should find or make more cowries, he might be able to cheat the system by buying goods with cowries that do not represent any resource he or she has. That is what money counterfeiters do.  But if the entire society decide to put more cowries in circulation, it will in no way increase the amount of chickens or cows or trees that the society has. What will happen is that since cowries are no longer as scarce as before, a chicken may now be exchanged for 15 cowries instead of 10. That is what you call an inflation viz a viz Inflation in the money value of the chicken.

In all my talk replace the cowry shells with square paper cuts signed by the king or rulers (Thats what paper money is).
Instead of going to the sea to find more cowry shells to put in circulation, you just have to print and cut more papers with special features so that counterfeiters cannot do same.

Homonide:

Even though i aint no economist, i think you guys are missing a fundamental an important point why Countries can't just mint money when they need it, which is that- money is used in minting money
It is said for instance that the cost of producing the polymer notes in Nigeria is actually more than the value of the notes themselves.

Katsumoto:

The value of the currency is not linked to the productive capacity of a country. It is no secret that most exporting countries want a lower value for their exports so as to increase their exports. The chinese have been manipulating the Yuan so as to sell more products which is a disadvantage to other competiting countries such as the US and the EU. The value of the Naira dropped in the 80s as necessary conditions from the IMF for the loans from the Shagari and IBB (SAP) governments. Japan is an export driven country, yet the Yen has a lower value than the Swiss Francs. Also, before the advent of the Euro, the Sterling had more value than the Mark yet Germany exports more than Britain.

kulutempa:


I am talking about the value of the currency with all other things being equal.  I was not talking about currency manipulation which is a different thing altogether, and the hole in your argument is that while it is true that export oriented countries try to deliberately lower the value of their currency to make their exports more competitive, can you give me one example of a country that is unproductive and has managed to keep a strong currency with low inflation over the medium to long term (say 5 to 10 years)  Just one.

kulutempa:

One more thing.  If the value of the Naira dropped in the 1980's because of IMF loan conditions, how come it has not gone back up 25 years later?  Just asking.