How does country debt work if the country prints its own currency (ex USA). Why are people so concerned about it?
In: Economics
I am not an economist or money theorist, but I think I know some of the basics. I’ll gladly accept correction if I get it wrong.
The thing is, you have to stop thinking of currency as money. It isn’t money, it is an IOU written by the government. At one time, the value of currency was that the printing government pledged that you could redeem it for gold at a set value. (The “gold standard”)
Now, however, the currency of modern nations is fiat currency, redeemable for nothing. It’s only use is in the fact that everyone agrees to accept it for payment The US legislates its use within its own borders, but international acceptance relies on the fact that people can trust the US gov’t to repay its debts. Ultimately, the value of the US dollar is supported by the GNP, the total work output of its citizens and the value of the resources and manufactured goods exported. As long as the US is a going concern, you can use US dollars to buy stuff from the US. Many other countries use US currency as a reserve currency for just that reason.
The problem comes when there is more currency in circulation than the US can reasonably redeem. Since the currency is fiat, its actual value is able to move up and down freely in response to market forces.
A second aspect is that almost any purchase can be thought of as an auction. Most goods and services are in finite supply. So if there is a lot of currency available but only a fixed amount of widgets, the number of bills you have to trade for a widget goes up. (this is classic inflation) But rising costs of widgets make for an unhappy population. So many governments resort to printing more currency and distributing it. This makes people happy in the short term, because now they have more “money” with which to buy the more expensive widgets. But the market soon corrects and adapts to the new more numerous currency and the prices rise again. Do this too much and you get runaway hyperinflation as was seen in preWWII Germany, modern Zimbabwe and others.
If US currency experiences too much inflation, many countries will stop using it in international trade, they will get rid of their US currency foreign reserves and the net value of a dollar will plummet because less people will want it or find it useful. This can be really tricky to manage because money is a huge and complex system and is prone to what is known as positive feedback effects.
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