A friend was trying to explain to someone why the government can’t just print more money to help the economy and reached out to me for an economic explanation rather than use “because the Minister of Coin said so”. I thought to myself “self, this might be a more important thing to discuss rather than the name of a rum or who profile pic looks better as a cartoon”.
So the question at hand is, if the problem is we don’t have enough money then why can’t we just print more, rather than borrowing money from every Tom, Dick, Harry and Xi Jinping? Sounds like a reasonable question right? I mean if you don’t have enough chataigne you could just go plant more trees or however chataigne grows right….yeah eww…I doh eat that.
Well here’s the thing, the value of a nation’s currency needs to be backed by the economic output of that country. If you just fire up your HP Deskjet and start printing more money without increasing the goods and services in a country all you’re going to do is cause inflation. That’s because consumers will be able to demand more goods, but if you have the same amount of goods, all that will happen is an increase in prices. In economics we call that demand pull inflation or “too much money chasing too few goods”.
Don’t believe me? True, I’m a bush economist but lets look at a simplified example below, *gestures like Vanna White*, using a chataigne based economy.
As you can see in the top table, when the money supply is increased without a corresponding increase in chataigne production the result is an increase in prices or the rate of inflation, ceteris paribus (that’s economic speak for all other things remaining equal…salute to Mr Balwant, my A Level Econ teacher). However, in the bottom table, when the production of chataigne increases with the increase in money supply….tada!!!…there is no inflationary impact, ceteris….never mind.
Now I know you might be thinking “ok TANA, pump yuh brakes….what about when the government increases the amount of money in the economy via monetary policy?” Well gold star for you, now you’re using the grey matter between your ears. However, two things to remember with monetary policy, 1. the Central Bank isn’t technically increasing the money supply it’s increasing the amount of money in circulation. The total amount of money remains the same and 2. putting money into the circulation is done at a time when inflation is low and there is excess capacity in the economy to absorb it. You can find a more in-depth, more mind-numbing post on Monetary Policy somewhere on this website if you’re interested.
Some people might say “well so what if it causes inflation, I doh mind a little price increase if I getting money in my pocket”. Well before we brand that person a lunatic lets look at the impact of inflation and see if the tradeoff is worth it.
Apart from just increasing prices, inflation reduces the value of your money and your savings. A dollar tomorrow is worth less than a dollar today and in the case of hyperinflation the value could change by the minute such as in places like Zimbabwe in the 2000s and Germany in the 1920s. Some of you may have heard the stories of hyperinflation in Germany where so much money was needed to do anything that people had to carry it around in wheelbarrows. The money was so worthless, imagine sprangers were stealing the wheelbarrows, but leaving the money.
Another consequence of inflation is that it causes the value of your currency to depreciate. How so? Well without boring you even more with the details of Interest Rate Parity (IRP), lets just say that countries with higher inflation rates will see their currencies depreciate against countries with lower inflation rates. Imagine what that would mean for our external debt which is denominated in US dollars. Plus inflation increases interest rates which reduces the value of bonds including Government of T&T Bonds which could impact your pension. Not to mention the impact on the cost of pistachios and the foreign toilet paper we like to rush for at Pricesmart in a crisis or the camo leggings in your Amazon cart (I telling Gary eh). Before you point fingers at the US who prints money like it’s flyers for Kabuki parties, remember the US dollar is the world’s reserve currency. They could do things others can only dream of. They have “biggest country privilege”.
In conclusion, just like if you’re selling 100 boxes of bess curry-cue you should only sell 100 tickets, the same way there needs to be balance between the money supply and the goods and services produced by a nation. It doesn’t matter how good your printer is.