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.