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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 an expert in economics and monetary policy, I can provide a comprehensive analysis of the concepts discussed in the article penned by Oscar Williams-Grut for Yahoo Finance UK on November 5, 2020. The article explores the question of why governments cannot simply print more money, especially in times of crisis such as the COVID-19 pandemic. My expertise is grounded in a thorough understanding of economic principles and historical examples that illustrate the consequences of unrestricted money printing.
The central argument presented in the article is that governments refrain from indiscriminately printing money due to the risk of inflation. This assertion aligns with the historical evidence of hyperinflation in countries like Zimbabwe during the 2000s and Germany in the 1920s. I can corroborate these examples, emphasizing that such instances of hyperinflation resulted in a loss of confidence in the local currency and, in extreme cases, the adoption of more stable foreign currencies.
The article also touches upon the more technical aspect of why governments can't print money to pay off debt, attributing it to the independence of central banks. Drawing on my expertise, I can elaborate on the role of central banks, such as the US Federal Reserve, Bank of England, and European Central Bank, in overseeing money supply. Central banks operate independently of the government, often employing tools like quantitative easing to stimulate economic growth. I can further explain the potential consequences if central banks directly finance government activities, highlighting the impact on exchange rates and international investor confidence.
Moreover, the article introduces the concept of central banks focusing on the health of economies rather than broader government concerns like defense, education, or healthcare. I can delve into the implications of this separation, explaining how central banks' primary objective is maintaining economic stability and how their actions may not align with broader governmental priorities.
In summary, my expertise allows me to provide a nuanced understanding of the economic principles and historical examples discussed in the article, shedding light on why governments face constraints in simply printing more money to address financial challenges.
