Readers Comment. the obvious question is why doesn’t the bank of England just print the money instead of borrowing the money?
Many often ask why government’s don’t print more money to deal with the problem of National debt.
The reason is that printing more money doesn’t improve economic output in any way. It merely causes inflation.
Suppose an economy produces £10million worth of goods. e.g. 1 million books at £10 each.
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 firms would push up prices.
The most likely scenario is that if money supply was doubled. we would have 1 million books sold at £20. The economy is now worth £20million rather than £10million. 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.
If the government printed more money. It would create inflation. The price of goods would rise, it would have to increase benefits and wages inline with inflation. Government spending would rise because of inflation. Borrowers would require higher interest rates to buy bonds. Printing money would not solve the problem but create additional problems of inflation.
Printing more money is exactly what Weimar Germany did in 1922. To meet Allied reparations, they printed more money; this caused the hyper inflation of the 1920s. The hyper inflation led to the collapse of the economy.
However Printing Money Doesn’t always cause Inflation
In a recession with periods of deflation, it is possible to increase money supply without causing inflation.
This is because the money supply depends not just on monetary base but also 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)
23 comments ↓
Hi
I would be grateful if any one had any thoughts on the following question.
I understant that if a government were to print more money and circulate it into its own economy, that this would inevitably lead to increased inflation in its country. Sound argument for not printing more money.
But why would a country not print more money to purchase from other countries (e.g. to repay debt or to purchase raw materials). Wouldn’t the extra money then simply be dumped into the other country, leading to higher inflation in that country and not your own? Or perhaps is the answer that in dumping the extra money overseas, you are indirectly creating more money in your own territory?
Maybe a naive question but I would love to have a good answer to it!
Many thanks
AG
Hmmm….does printing money cause more or less inflation than borrowing from institutions who lend on a fractional reserve system?
The reason the Govt borrows is because the king (&country) got conned by William Patterson in 1694 and has been screwed ever since.
This explanation completely ignores the fact that when the government “borrows” money from the Central Bank that’s exactly what it does. It creates the money out of thin air and gives it to the government to spend in exchange for Government debt (i.e. IOU’s).
Not only that, but through the process of fractional reserve banking private banks use the Central Bank’s “new money” as the basis for increasing the money supply by an additional 1,000% (10X) through private lending.
Adding insult to injury, not only does the current system multiply the inflationary impact of government deficit spending (10X as much as if the government had simply been honest and printed the money itself), but it also requires the government to levy additional taxes on our children to “repay” the principal and interest on the original “loan”.
The fact is, if the government cut out the middleman and used seignorage (i.e. the government’s power to levy an indirect tax on its citizens by simply printing more money) we would all be much better off (at the expense of the bankers).
Printing money does NOT necessarily cause inflation. There are obvious instances of where printing very large amounts of money HAS caused inflation, e.g. Germany in the 1920s and Zimbabwe today. But print the right amount at the right time and the results with luck can be entirely beneficial. Here are some examples of where money printing is not inflationary.
1. The instance cited above, namely paying off the national debt with newly printed money. Japan has printed large amounts of money and bought back national debt over the last ten years. This goes by the fancy name “quantitative easing”. The idea is to drive down long term interest rates with a view to simulating demand. Unfortunately this ploy has had precious little effect in Japan (on inflation or anything else). One of the reasons for the non effect is not too difficult to fathom: holders of national debt regard it as SAVINGS – they are not going to run out and spend this just because a tranche of savings are converted from government debt to cash. They’ll just plonk the cash in a deposit account. Put another way, expanding the money supply depends crucially on what people do with the newly printed money. If they don’t do much with it, there will be no effect.
2. Given a recession, it is entirely reasonable to print a bit of money with a view to stimulating demand and getting employment levels back to normal. Prof Joseph Stiglitz has been saying for years that Japan ought to do this. If governments can print exactly the right amount, the effect would be to bring employment levels back to normal with minimal inflation. There is also a discussion at a Financial Times site on the merits of printing money: http://blogs.ft.com/wolfforum/2008/12/central-banks-need-a-helicopter/
However, it is questionable as to whether governments have the skill to print exactly the right amount. Milton Friedman claimed that governments do not have this skill and that the best option was to go for a small annual money supply increase, while allowing booms and recessions to work themselves out.
Thanks.
I recently wrote a post here: saying how increased money supply wasn’t causing inflation in US http://www.economicshelp.org/2008/12/money-supply-and-inflation-in-us.html
The example of 1 million books is good but forgets one thing. There is a recession and although he may have 1million books the problem is only half of them have sold and probably at a discount too. Put more money in peoples pockets and maybe he can stop discounting and sell more of the million. This would increase GDP and stop deflation too. The trick would be to not put so much money out that demand for the books dosen’t exceed the 1million available. Simple eh!
I’m confused, please help!
Say, eg, the govt printed money to double the money supply for every 1million currently in circulation, thus making 2million, would my savings of 1million then be worth half million?
[...] Problem with Printing Money [...]
Can anyone answer AG’s wonderful question? I’m struggling withg it myself. Just to repeat his question :
Hi
I would be grateful if any one had any thoughts on the following question.
I understant that if a government were to print more money and circulate it into its own economy, that this would inevitably lead to increased inflation in its country. Sound argument for not printing more money.
But why would a country not print more money to purchase from other countries (e.g. to repay debt or to purchase raw materials). Wouldn’t the extra money then simply be dumped into the other country, leading to higher inflation in that country and not your own? Or perhaps is the answer that in dumping the extra money overseas, you are indirectly creating more money in your own territory?
Maybe a naive question but I would love to have a good answer to it!
Many thanks
AG
I do not understand “printing money”.I take it is not borrowed through gilt sales so where and how does it appear in the governments figures?
Now hold on a minute! This article is bogus. You can simply print more money and destroy the money slowly over a longer period from taxes collected. This is the equivalent of interest-free borrowing. And therefore would not lead to inflation in the long term.
To answer the question about using printed money to buy goods from other countries: it comes to the same thing because those printed pounds will always end up with somebody, and those pounds will inevitably come back to the UK, because no other country besides the UK accepts pounds! So to avoid inflation, the government should destroy the money over time from taxes like I’ve said. By the way I’m not an economist, just figuring it out like you folks. I’m right, am I not?
[...] Many have linked to a post where I explain how printing money can lead to hyperinflation. [...]
Printing money by a government, might not lead to inflation, if that government handles that printed money wisely. Take the US and other Western economies that are in trouble today because of the credit failure by banks and financial institutions.
If I were one of those governments looking to get out from under these financial problems by “printing” my way out I would do it this way to solve the problem and prevent any form of inflation that might result from that “printing”.
First, the money that I “print” I would give directly to the “people” in the form of a 33 year interest-free loans limited to $400,000 dollars per. Instead of giving it to any industry or business. This way would get the money into the economy quicker, more efficiently and have a better affect on the economy than going through the regular business cycle and hope they lend it out.
This method lets the borrower pay-off all his interest-burdened monthly debt: mortgage, credit cards, student and auto loans etc. Lowering the borrowers monthly costs substantially allowing him to either save or spend that positive differential created by ridding himself of the interest on his debt and the extention of his principal out over 33 years. While at the same time re-capitalizing those finacial institutions that held that debt. This would keep government out of business’s business and solve two problems using the same dollar a two-for-oner.
To prevent any inflation from this printing the government, as those loans are repaid, would take that money out of the economy. And the banks, having received a large influx of capital, would only lend out what they would have been repaid over the year had nobody defaulted on their debt.
Though trillions were printed only a 1/33 of the money would be affecting the economy at any given time. So, at most, inflation would be around 3%. Had the money been borrowered we be paying about 6% compounding for years.
hey the quetsion which AG asked is very good i was thinking about solution so just trying to find the answer through applying accountacy i dont know may be i am wrong……..when u print money and pay off your debt with it to other country the debt on the laibility side of the balance sheet is wipped off but your assets standing as it is so your balance sheet will not tally….where will you put the diffrence….? well i think this may be a wrong solution but if any of you have the anwer then please reply
The biggest problem with government printing money is that banks regard it as their prerogative and is the source of all their income. Since, under a fractional reserve banking system, banks lend out between 10x and 30x what depositors invest, banks have created between 90% and 97% of all the money in use and they charge interest on all that money. If government stepped in to create money instead, the banks in their current lucrative form would cease to exist.
Printing money would affect the exchange rate, so it would be adjusted for that way and would not help you pay off national foreign debt
Hi All,
I went through this blog, i have a question on printing Money, Lets CountryA came up with ProductA with costA, CountryB is intrested the Product and buys the product for CostB, lets assume the gain CountryA got is GainA, now the question is how the CountryA represents this gainA????
if it were that easy to solve an economic problem we wouldnt be in this situation in the first place
nw i more thing to all this if there is a construction required to be done for which the GOVT is payin an international company . why can’t the govt print extra money get these jobs done or defense deals etc.
@AG: The money would be useless to an importer until it is converted into his home country’s currency. When he does that the money would eventually find its way back into the country of origin and lead to inflation there.
Remember the little bits of paper we call money is actually worth nothing. Its the value given to it by a country’s central bank that is worth something. Outside your country the money is only worth something when it is exchanged into the local currency. That exchange is only possible if the originating country’s central bank allows it and accepts its own currency back.
However there are a few countries in the world that can get away with printing money to pay off foreign debts to some extent. Countries like the US, European nations and Japan have currencies that are used by central banks around the world to keep their foreign exchange reserves. So their currency is more acceptable globally. However even here there is the risk that if you continue to print money central banks will loose confidence in your currency and start using other currencies (such as what china is starting to do with its dollar reserves).
HI SO THE END POINT IS THAT PAPER MONEY IS NOTHING AT ALL . IF U INCREASE PRINTING IT WILL LOWER UR MONEY VALUE IN COUNTRY N CAUSE INFLATION . AND SAME THING IF U WANT TO EXPORT ANT ITEM TO OUTSIDE ITS PRICE WILL NOT B ABLE TO TOLERATE BY BUYERS AS THE PRICE IS ALREADY HIGH IN UR COUNTRY .THIS WILL CREATE A BUSINESS SO DIFFICULT TO DO N ALL WILL HAPPEN WILL B DIASTER .
as to the answer to the first question about ‘dumping’ money, that new money will just come back as demand for exports, so exporters will (by the cantillon effect) experience a ‘boom’ that is only due to monetary disequilibria, not because of real demand. As the exporters demand more resources and labor, the economy will be further shoved off kilter towards exporting. This is what the Chinese do buying American debt, and what American does by making unilateral loans to nations and then selling them guns. It is an exporter subsidy and means a redistribution of wealth from other sectors of the economy to this one.
I am writing a book about this thread, so stay updated with my blog!
One more effect! (sorry . . .
)
If the balance of trade is uhh NOT balanced, like the US, then the ‘dumping’ will just raise demand on national assets, like land, houses, and companies. This might explain in part why so many foreign investors were bought in so deeply into the american housing market.
In a way, this sort of inflation is like the government having a garage sale on the nation’s assets which, the last time I checked, were the people’s homes, businesses, and land.
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