Printing Money and Effect on Sterling

Readers Question: I understand 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?

Firstly, it is not inevitable that printing money will lead to increased inflation. It is more complicated than that (e.g. money supply and inflation in US)

Printing money will cause inflation if:

  • Velocity of circulation is stable
  • Money supply increases faster than real output

However, if you do increase money supply faster than real GDP growth, then ceteris paribus, you would expect inflation and a decrease in the value of money.

If you print money to buy goods oversees, you are effectively devaluing your currency, reducing the purchasing power of Sterling.

If the government increased the supply of pounds (by printing money), the Pound would be worth less on the foreign exchanges so you would be able to buy less foreign goods / debts with Pound Sterling. So printing money would not solve the problem of our foreign debt.

It reminds me of the experience of Weimar Germany in 1923. Part of the problem was that they were trying to pay external debts (war reparations to the Allies). One reason for printing money was to pay of their foreign debts, but this lead to a depreciation in the German Mark and domestic inflation as well.

At least, that’s my understanding as to what would happen. I guess there’s no such thing as a free meal and printing money doesn’t have any effect on increasing real output / real income.

By on January 29th, 2009

6 thoughts on “Printing Money and Effect on Sterling

  1. The article says that excessive printing of money will not necessarily result in inflation. I used to think that when a country prints extra money, inflation would be unavoidable. Thanks to you, I now know that if the increase in money supply is lower than the real GDP growth, then inflation can be averted.

    Anyway, the currency is devalued, and the repurcussions can be felt. Printing too much money isn’t the answer when the economy is destabilized. This would just make the situation worse. The best way is to spend wisely, without borrowing too much when the economy is thriving.

  2. The UK is some way off any really effective money printing at the time of writing. As I understand it, the authorities are about the start Quantitative Easing which involves the government – central bank machine swapping printed money for securities. But I doubt this will significantly boost demand or inflation: if I am offered cash in exchange for my stocks or shares I am not going to go on a spending spree because I regard these holdings as SAVINGS.

    Effective (and potentially inflationary) money printing consists of an “unfunded budget deficit”, i.e. government spending more than it collects in tax and borrowing. I am in favour of this, but by the time the UK government gets round to doing this, the recession could be over, and they’ll just end up stoking a boom/inflation in two years time. Or as Simon Jenkins put it in a Guardian article, the UK government is doing everything APART from what it should be doing: boosting demand (“The nation has a bad case of mad treasury disease”http://www.guardian.co.uk/commentisfree/2009/jan/21/treasury-banking-keynes-demand)

  3. well i have read the article on printing lots of money & i’do like to say that it is really inflationary looking at the current Zimbabwean scenario. anyway i would like people to send me their views on ways of solving or reducing the hyperinflationary environment in Zimbabwe.

  4. Whether it is money printed by government, without the sale of securities, or by selling securities to the banking community, or generated by the banking system, if it increased at a greater ratio than the production ratio, it will eventually result in price increases.

    Now inflation doesn’t take place on everything across the board, although eventually all production and services may end up affected, and prices will rise; but again, not necessarily always. The sectors of the economy affected will be those into which the additional money supply is injected.

  5. Printing money will eventually push prices higher
    The threat of deflation is how governments around the world have justified splashing vast chunks of cash, which they don’t have, on bailing out industries from banking to car manufacturers. And it’s also the reason why the US Federal Reserve, and now the Bank of England – through Quantitative Easing (QE) – are printing money like there’s no tomorrow.

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