Why do government inflate the value of currency by printing more if printing more does nothing to increase the buying power that government has?
In: 2
Sometimes government prints deliberately because it is out of money.
Sometimes supply of good decreases unexpectedly, e.g. to supply chain disruptions.
Sometimes government makes a mistake estimating how much supply of goods will increase, and prints more money than necessary.
It does increase buying power of the govt. It just does it by decreasing everyone else’s, so the total buying power stays the same.
Inflation is roughly equivalent to a flat tax of `(printed_money/total_money)*100%` on everyone.
Long story short, the reason is to lower interest rates, encourage borrowing, and reduce the value of the currency to make exports more attractive, not to give money directly to the government (even though that also happens).
More importantly, though, the government doesn’t “print money”, at least not in the sense you’re meaning. The government *literally* prints money, in that they’re in charge of minting physical currency, but the money printing that increases the money supply is done by the Federal Reserve.
Without getting too into the weeds, in a recession, interest rates would, *in theory*, cause rates to increase as credit risk increases (as companies are more likely to default), the government borrows more money (which is a drain on the existing money supply) and banks have less capital to lend out (which is an ELI5 post unto itself). Increased rates mean less economic activity, as businesses and individuals borrow less money for building new buildings, buying new cars/houses/assets, etc..
To combat this, the Federal Reserve prints money, which increases the supply of money. When there’s more money available, the price of money (the interest rate) goes down – this is the same as any other asset, where oversupply leads to a decrease in price.
This eventually leads to inflation, but inflation is a lagging indicator, and the lower interest rates can be a mechanism to directly address a downturn.
The goal of the government (the central bank) is generally to keep the value of money slightly decrease over time, and one way of doing that (although not always that effective) is to print more money.
Why do they want the value of money to decrease slowly? Because it encourages people to make use of it. Money is useless in a mattress, but very useful if you invest it or put it to the bank.
Why is it not always effective? Because contrary to popular belief, the government is not the only one to “print” money (it is the only one to print cash, but not other kinds of money). When you go to borrow money to a bank, they don’t take it from somewhere else and give it to you, they literally open a new account with money magickly on it out of nowhere. It’s different from the government printing money, since there are rule on how much they’re authorized to create, and the newly made “fake” money (scriptural money in economic terms) with disappear just as magickly as it appeared when you pay back your loan. Because of that, the government only has limited control over how much money is out there, and therefore how much money is worth.
Also, money supply is only one of the things that influenced inflation. Supply and demand of goods also influence inflation. After all, inflation is just the price of a given basket of goods, and those goods can change prices for many other reasons (like a pandemic, a war, other economic issues, etc).
Latest Answers