Welcome, Guest: Register On Nairaland / LOGIN! / Trending / Recent / New
Stats: 3,194,031 members, 7,953,101 topics. Date: Thursday, 19 September 2024 at 10:43 AM

The Reasons Why Countries Don't Print Money Anyhow.(1) - Business - Nairaland

Nairaland Forum / Nairaland / General / Business / The Reasons Why Countries Don't Print Money Anyhow.(1) (378 Views)

Why Is Access Bank Deducting My Money Anyhow / 3 Reasons Why Countries Devalue Their Currency / Foreign Loan: Why Can't CBN Print The $5.5bn Instead Of Borrowing? (2) (3) (4)

(1) (Reply) (Go Down)

The Reasons Why Countries Don't Print Money Anyhow.(1) by Yhungtee44(m): 9:11am On Jul 25, 2020
Producing more money doesn’t increase economic output – it only increases the amount of cash circulating in the economy. If more money is printed, consumers are able to demand more goods, but if firms have still the same amount of goods, they will respond by putting up prices. In a simplified model, printing money will just cause inflation.

money-supply-inflation
Suppose an economy produces $10 million worth of goods; e.g. 1 million books at $10 each. At this time the money supply will be $10 million.
If the government doubled the money supply, we would still have 1 million books, but people have more money. Demand for books would rise, and in response to higher demand, firms would push up prices.
The most likely scenario is that if the money supply were doubled, we would have 1 million books sold at $20. The economy is now worth $20 million rather than $10 million. But, the number of goods is exactly the same.
We can say that the increase in GDP is a money illusion. – True you have more money, but if everything is more expensive, you are not any better off.
In this simple model, printing more money has made goods more expensive, but hasn’t changed the quantity of goods.
money-supply-million-books

Doubling the money supply, whilst output stays the same, leads to a doubling in price and inflation rate of 100%

money-supply and inflation

From year 2000 to 2001, the money supply increases without inflation.
In 2001, the money supply increases 20%, and the number of widgets increases 20%. Therefore, prices stay the same – the extra money is matched by an equivalent rise in the money supply.
It is only in 2003 when the money supply increases from 14,000 to 20,000 that the money supply increases at a faster rate than output and we start to get rising prices.
Problems of inflation
Why is inflation such a problem?

Fall in value of savings. If people have cash savings, then inflation will erode the value of your savings. £1 million marks in 1921 was a lot. But, due to inflation, two years later, your savings would have become worthless. High inflation can also reduce the incentive to save.
Menu costs. If inflation is very high, then it becomes harder to make transactions. Prices frequently change. Firms have to spend more on changing price lists. In the hyperinflation of Germany, prices rose so rapidly; people used to get paid twice a day. If you didn’t buy bread straight away, it would become too expensive, and this is destabilising for the economy.
Uncertainty and confusion. High inflation creates uncertainty. Periods of high inflation discourage firms from investing and can lead to lower economic growth.
More on problems of inflation

Printing money and national debt
Governments borrow by selling government bonds/gilts to the private sector. Bonds are a form of saving. People buy government because they assume a government bond is a safe investment. However, this assumes that inflation will remain low.

If governments print money to pay off the national debt, inflation could rise. This increase in inflation would reduce the value of bonds.
If inflation increases, people will not want to hold bonds because their value is falling. Therefore, the government will find it difficult to sell bonds to finance the national debt. They will have to pay higher interest rates to attract investors.
If the government print too much money and inflation get out of hand, investors will not trust the government and it will be hard for the government to borrow anything at all.
Therefore, printing money could create more problems than it solves.
See also: Printing money and national debt
Hyperinflation in Germany during the 1920s
inflation

Inflation was so bad in Germany that money became worthless. Here a child is using money as a toy. Money was used as wallpaper and to make kites. Towards the end of 1923, so much money was needed, people had to carry it about in wheelbarrows. You hear stories of people stealing the wheelbarrow, but leaving the money.

Printing more money is exactly what Weimar Germany did in 1922. To meet Allied reparations, they printed more money; this caused the hyperinflation of the 1920s. The hyperinflation led to the collapse of the economy.

Hyperinflation also occurred in Zimbabwe in the 2000s.

Printing money and the value of a currency
If a country prints money and creates inflation, then there will be a decline in the value of the currency.

Suppose inflation in Germany is 100%, and inflation in the UK is 0%.
This means German prices are doubling compared to the UK.
You will need twice as much Germany currency to buy the same quantity of goods.
The purchasing power of the German currency is declining, therefore the value of mark will fall on exchange rates.

Hyperinflation in Germany causes a rapid fall in the value of the German mark to the dollar.

In a period of hyperinflation, investors will try and buy a stable foreign currency because that will hold its value much better.

Printing money doesn’t always cause inflation
In a recession, with periods of deflation, it is possible to increase the money supply without causing inflation.

This is because the money supply depends not just on the monetary base, but also the velocity of circulation. For example, if there is a sharp fall in transactions (velocity of circulation) then it may be necessary to print money to avoid deflation (see: example of US and increasing money supply)

In the liquidity trap of 2008-2012, the Bank of England pursued quantitative easing (increasing the monetary base) but this only had a minimal impact on underlying inflation. This is because although banks saw an increase in their reserves, they were reluctant to increase bank lending.

However, if a Central Bank pursued quantitative easing (increasing the money supply) during a normal period of economic activity then it would cause inflation.
Re: The Reasons Why Countries Don't Print Money Anyhow.(1) by finnestdope(m): 9:13am On Jul 25, 2020
hmmm
Re: The Reasons Why Countries Don't Print Money Anyhow.(1) by godkiller(m): 9:13am On Jul 25, 2020
Now I know better, thanks.
Re: The Reasons Why Countries Don't Print Money Anyhow.(1) by Hezzyluv: 9:13am On Jul 25, 2020
Educating
Re: The Reasons Why Countries Don't Print Money Anyhow.(1) by Kriss216: 9:17am On Jul 25, 2020
This type of threads barely makes front page. But, if it's Snake or BBN, it's front-page straight.

1 Like

Re: The Reasons Why Countries Don't Print Money Anyhow.(1) by illicit(m): 9:35am On Jul 25, 2020
oh
Re: The Reasons Why Countries Don't Print Money Anyhow.(1) by Nobody: 9:38am On Jul 25, 2020
Economics note, lol
Where are those people who keep coming here telling the govt to print more money to help the economy, they should come and read this :-)
Re: The Reasons Why Countries Don't Print Money Anyhow.(1) by Nobody: 9:50am On Jul 25, 2020
You'll make a great lecturer.

Why do retailers tend to inflate the price of goods at any slightest opportunity
Re: The Reasons Why Countries Don't Print Money Anyhow.(1) by okeyglm: 10:40am On Jul 25, 2020
this is what capitalist told u. didn't USA print money during 2008 recession. Obama printed trillions of dollar that take USA out of recession. They only fooled you developing . dissuading you from print money but they doing the same. For sustainable economy growth. we can should print money for development and not for consumption.

(1) (Reply)

Ezy Multistores Software Review | Multiple Bonuses And Demo / Help: 16 Thousand Missing From My First Bank Account. / How To Start Importing Products From China Very Cheap & Sell In Nigeria Costly

(Go Up)

Sections: politics (1) business autos (1) jobs (1) career education (1) romance computers phones travel sports fashion health
religion celebs tv-movies music-radio literature webmasters programming techmarket

Links: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Nairaland - Copyright © 2005 - 2024 Oluwaseun Osewa. All rights reserved. See How To Advertise. 21
Disclaimer: Every Nairaland member is solely responsible for anything that he/she posts or uploads on Nairaland.