Why can't we just print money?

Apr 21, 2020 Cayman Islands

Hey everyone, welcome to Food for Thought (a new blog series I launched last week) where I answer one common question and hopefully we both learn something from it.

This week's topic is a bit relevant to our current situation and one of the most famous questions asked at your basic Economics class:



Why can't the government just print more money to solve national issues such as poverty?

The short answer is: Inflation.

The long answer is:

Let's first start on why money was invented in the first place. Before fiat money (paper money which technically has no instrinsic value) was invented, our ancestors use the barter system. It is a system where goods and services are exchanged between entities. However, one of the major problems with this is that: before you can buy goods, you first have to find someone that does not only sell the product that you want, but also want the product that you sell. This is what we call the double coincidence of wants. (I vividly remember this from Dr. Sauler's Macroeconomics class!)


To solve this problem, the government came up with a legal tender such as fiat money. People don't want a piece of paper, they want what you can exchange it for! Fiat money derives its value from underlying goods and services. Next time you go to a market, remember that the money you are holding is literally just piece of paper with purchasing powers.


Now back to the question, so why can't the government just print more of that, distribute it to the poor, and eradicate poverty completely?

Before we answer, just a quick mental exercise: if you think poverty can be eliminated by printing money, or by any other means, why hasn't any country done it yet? All countries (correct me if I'm wrong but I doubt it) in the world has a marginalized sector, the only difference is how much inequality there is between the poor and the non-poor. Now think about this and let me know your opinion!

Printing fiat money and injecting it to the economy is just similar to adding paper into circulation without its value being matched by any goods or services. It does not equate to increase in productivity. It just spreads its value to the existing economic output.


Imagine this: If the poor has suddenly been given a lot of money, they can now purchase more goods. They will buy the things they couldn't afford before.


However, the number of products being sold by the businesses remain the same. The only difference this time is that they have more customers who want and can afford what they sell.


If you are the business owner, what will your next action be? Your supply is limited. Will you not change the price knowing that people are willing to pay more to get your product?


If you want your supply to catch up on the increase in your demand, you would have to increase your production. And guess what? It's not free!

Again, knowing all these, will you not change your prices?


If you are a rational business owner, you would raise your selling price.


Always remember that excessive demand in comparison to supply pushes the general price level up.


Ofcourse this example does not consider a lot of things that might affect a decision maker, such as market competition, rationality, income, employment, policies in place, etc. (Ceteris Paribus!)  It's just a rough example but you get what I mean right? lol. We can talk about these topics in next week's series if you want. Let me know!


If people have twice as much money, but the cost of goods is also twice as much, nobody is better off. Printing money will not solve your problem, it will just cause the prices to go up, and your money to lose its value.


Read on the case of Zimbabwe. Their economy was hit by hyperinflation in 2008 for the same reason.


And that's it-- I hope you learned something today. I enjoyed writing this one. Let me know your thoughts! Til next time~



PS. I dedicate this post to Dr. Deborah Sy and Dr. Jesson Pagaduan, who are both my good friends in college! I was thinking of you two while writing this!



___
Food for Thought is a blog series where we discover and gain deeper understanding on a certain topic. Everyone is welcome to join the discussion and express their own thoughts.


6 comments

  1. 'If people have twice as much money, but the cost of goods is also twice as much, nobody is better off. Printing money will not solve your problem, it will just cause the prices to go up, and your money to lose its value.' -- I feel this every.single.time I pay for my bills, my groceries and practically everything that require cash purchase! The cycle never ends!

    I can only truly wish and hope for that day to come wherine saving money and investing become a willing norm, meaning everyone affords it and do not feel some sense of fear or doubt when thinking about it!

    Thanks for this, Ann. We are indeed in tough times, but it pays to be properly informed so we can prepare for a better future!

    Cheers,
    Hanna

    ReplyDelete
    Replies
    1. I agree with you Hannah, investing and saving should be a willing norm. Hopefully sooner than later. It really does pay to be properly informed. Thanks so much for dropping by! 💕

      Delete
  2. I used to ask the same question as a child! But now I know how much more complicated the economy is and I just don't think about it anymore ahaha!

    https://sundaydahlias.com

    ReplyDelete
    Replies
    1. Yes it is! I used to ask these questions as a child too. There is so much more than meets the eye inside our own governments which makes it interesting. Anyway, thanks for dropping by! 💕

      Delete
  3. Wow makes sense. I used to ask myself with this question and did not bother to find the answer. Thanks for this.

    ReplyDelete
    Replies
    1. You're welcome! Glad I was able to shed some light^^

      Thanks for dropping by 💕

      Delete