Updated ·2-min read
WATCH: Why can’t governments just print more money?
Governments around the world have spent billions this year on their response to the COVID-19 crisis — billions that, before the pandemic, many politicians said countries didn’t have or couldn’t afford.
So why can’t governments just print money in normal times to pay for their policies?
The short answer is inflation.
Historically, when countries have simply printed money it leads to periods of rising prices — there’s too many resources chasing too few goods. Often, this means every day goods become unaffordable for ordinary citizens as the wages they earn quickly become worthless.
In Zimbabwe during the 2000s, monthly inflation reached as high as 80 billion percent, according to some estimates. The local currency was eventually abandoned in favour of the US dollar.
In a famous instance known as “hyperinflation” in Germany during the 1920s, citizens were pictured taking wheelbarrows full of cash to shops to pay for basic goods. Spiralling prices then were more to do with the punishing reparations payments than money printing but it illustrates the problem.
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There’s a more technical reason why governments can’t simply print more money to pay off debt and pay for spending: they’re not in charge of it.
In most developed nations central banks like the US Federal Reserve, Bank of England, or European Central Bank are charged with overseeing money supply. Central banks are independent of government although sometimes do coordinate with them.
Central banks have churrned out billions in the last decade through quantitative easing — programmes of money printing meant to stimulate growth.
By buying up debt, central banks free up cash to be invested elsewhere — hopefully in economically productive things like businesses or new technology.
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However, central banks are only interested in the health of economies rather than broader government concerns like defence, education, or healthcare.
Separately, international investors could lose confidence in a country if its central bank is directly financing the government. Money supply and exchange rates are meant to reflect the size of an economy. If central banks are simply pumping out more money to pay off debt, it’s almost like a snake eating its own tail. Exchange rates would likely drop if this were to happen, leaving a country poorer and everyone worse off.
As a financial expert with extensive knowledge in economics and monetary policy, I can provide a comprehensive breakdown of the concepts discussed in the article about why governments can't simply print more money to address financial needs, particularly during crises like the COVID-19 pandemic.
The article touches upon crucial economic principles and historical instances to illustrate the limitations and consequences of excessive money printing:
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Inflation: Governments resorting to printing money often leads to inflationary pressures. This occurs when there's an oversupply of money chasing a limited number of goods and services. Zimbabwe's hyperinflation during the 2000s and Germany's hyperinflation in the 1920s are prominent examples illustrating how extreme money printing devalues currency, making it nearly worthless.
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Central Banks and Monetary Policy: In most developed nations, central banks like the US Federal Reserve, Bank of England, or European Central Bank manage monetary policy. These institutions control money supply through mechanisms like quantitative easing (QE), where they purchase government securities to inject liquidity into the economy.
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Government vs. Central Bank Control: Although governments may have spending priorities like defense, education, or healthcare, central banks are independent entities entrusted with regulating money supply and maintaining economic stability. They aim to stimulate growth by managing interest rates and controlling the flow of money.
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Confidence and Exchange Rates: Direct financing of government expenses by the central bank can erode investor confidence. Excessive money printing could lead to a loss of confidence in a country's economy, causing a devaluation of its currency and adversely impacting exchange rates.
In essence, the article highlights that while governments might be tempted to print money to finance spending or pay off debt, doing so can lead to severe economic consequences such as hyperinflation, loss of investor confidence, and devaluation of currency. The role of central banks is pivotal in managing the delicate balance between economic growth and maintaining stable monetary policies.
Understanding these concepts is crucial to appreciate the complexities surrounding monetary policy decisions and their profound implications on economies globally.
