Why the goverment of a country wouldn’t just make more money to make the country rich?
In: Economics
The more dollars you print the less valuable a dollar becomes.
Because the value isn’t in the currency, the currency is backed by the value of the country. If you have a country that produces no goods or services, if they have nothing of value the currency can buy from the country, then the currency is worthless. It doesn’t matter how much you print if no one is going to accept a currency that has no buying power.
The more money you make, the less value it has.
That’s what inflation is. Because of supply and demand, more money makes prices go up. Think of it like this: Everyone has a dollar and there’s a guy selling apples for a dollar. He has enough apples so each person can get one apple. Now everyone gets 2 dollars, but the guy has the same amount of apples. One guy decides he wants two apples, so he buys two. Other people see that there aren’t enough apples now, so they try to buy two apples also. But the apple vendor thinks, hey, if I raise my price to two dollars, then i can give everyone an apple and get twice the money! so the next day he raises the price to two, and while people are unhappy about it, they figure things are just like before, so they get one apple for two dollars. Now that apples are worth two dollars, you could say the value of the dollar just got cut in half, because it’s only worth half an apple now.
So what do you do? You print even more money so people can afford 2 apples again, and now everyone gets 4 dollars.
When governments do this, the money eventually becomes worthless and you have places like Zimbabwe, where people were buying bread with carts full of money, and the government printing $100,000,000,000,000.00 notes.
https://en.wikipedia.org/wiki/Inflation
Governments do this all the time, but usually there are central banks that control how much inflation can be created to keep it from running away like in Zimbabwe.
Printing more currency doesn’t make your country rich, it simply devalues the currency printed.
Think of trading card games, like Magic the Gathering.
Black Lotus is worth THOUSANDS of dollars. But if Wizards were to print a million new copies of the card, each new copy wouldn’t still be worth as much, cause now they’re not nearly as rare. That’s kind of how inflation works, and why you can’t solve your nation’s monetary issues by just printing more currency.
I think colonial Spain and pre-ww2 Germany kinda illustrates why this doesn’t work. If you have too much money something called inflation happens. Basically this means the value of an individual unit goes down, like the dollar or yen.
Spain got too much silver in their economy from South America and ranked their economy. Germany printed too much money to pay war reparations from WW1. This resulted in in it costing absurdly high prices for things like bread. There are famous pictures of Germans with literal wheelbarrow’s full of paper money on the way to go buy food.
Being rich is about having stuff. If you have lots of money, and very little stuff to buy with that money, you’re still poor, you just have higher numbers on that poverty.
With that said, you can totally do this to an extent.
This is the concept of things like MMT and nominal GDP targeting, where you can absolutely guarantee that a certain number of dollars will be around in 10 years. And that therefore, it’s worth oh… investing in a woodworking business that makes wood paneling for new housing construction that gets paid for with 30-year mortgages.
Because they can, at least on a vague national average, guarantee that enough dollars get spent on rent over the next 30 years to justify building the apartment building and guarantee that (at least on average) the mortgage gets paid for 30 years.
And because you printed more dollars, someone went out and invested in a real business employing people to cut down trees to build nicer housing.
I have a mortgage. Give me 5% inflation for 5 years, and not only am I 25% less likely to default, but I at least attempt to take a lot more vacations to Southern Utah because my bank eats 25% of my mortgage payment. And that writ large means it’s worthwhile for Vegas to expand their airport, invest in Strip expansions, maybe add a new show… And employ people in the doing. Then when my bank goes under, you just run off another trillion dollars and recapitalize them.
That’s literally how the Boomers got rich. Bought houses on 20% mortgages at 12% inflation, then refinanced at 8 and later 4, while incomes in dollar terms quadrupled.
So you went from paying 40% of your income to the bank to paying 5%, assuming you didn’t pay it off out of petty cash in the 90’s sometime. That’s a lot of extra consumption/savings!
Think of money as a unit of labor. You work, you get paid. Rich people leverage other people’s labor; there is a limit to how much labor you can do at a given wage.
If a government prints more money without more labor being added in, it just means everyone is getting a raise, including our landlord and the retailers that have to raise prices in order to cover increased wages.
To reduce inequality without increased productivity from labor, there would need to be a restructuring of wages and owner profits. To make everyone more rich, there would need to be an increase in technology and innovation (imagine if robots did all the work, even to the point of building new robots). Technology is the reason the average person in the west is richer in the 21st century than a king in the Middle Ages.
Currency is just a representation of wealth to make it easier to trade. If you create more money, without increasing the wealth of your country, the value of your currency will drop, not making any more rich and most likely creating huge econmic problems that will make your country in troubles.
You can’t eat money. You can’t live in money. You can’t drive money. Printing more of it doesn’t magically create more stuff for people to enjoy, and it’s the stuff that really counts. It’s not exactly the same, but printing money is closer in spirit to just telling you to always write your bank account as the number of cents rather than dollars. It’s a bigger number, so you must be richer, right?
Latest Answers