Have you ever wondered why countries can’t just
print more money to off their debts
or to feed the homeless or fix unemployment, or any other issue for that matter.
Now, this may seem like a rather silly question,
but I think it may be one of those questions
people might be a bit too embarrassed to ask,
but there’s no shortage of people wondering.
其答案 一言以蔽之 就是通货膨胀
The short answer can be summed up in just one word… inflation.
Inflation is defined as “…”
But I’ll get to that…
first though, we need to establish exactly what money… is.
this may seem obvious, but something you need to understand is that
money has absolutely no… intrinsic value.
What that means is that
money in itself has no actual value,
it’s only considered valuable because it can buy things,
but if you were stranded on a desert island, money would be totally useless.
Money only has value because we believe it has value.
This is called the Tinkerbell Effect,
something I learned about from Vsauce.
The Tinkerbell Effect is used to describe something
that only exists because we believe it exists.
And this is the case with money. Hypothetically speaking,
if people suddenly started to believe that money had no value,
it wouldn’t have any value.
Of course, it wasn’t always this way,
money has been around for millennia,
and when it was first used it was in the form of commodity money.
Things were traded that had actual value and uses,
比如盐 香料 马匹和武器
like salt, spices, horses or weapons,
as well as this precious metals such as gold as silver,
which technically don’t have any intrinsic value either,
but due to their raredity they are almost accepted universally as currency.
Then we have representative money.
Since cartying around everything you own can be difficult, representative money makes more sense.
You give your gold to a bank and they keep it safe for you,
and in return they give you a piece of paper
acknowledging that you own that gold
These pieces of paper can therefore used as money
as anyone can go and redeem the gold at any time.
But today, almost every country in the world uses fiat money.
Fiat money requires faith and trust in the government
that their money will have value
If we use a relatively young country as an example,
the United States has gone through all three monetary systems within 200 years.
In 1792, when the US stopped using European money.
The Coinage Act of 1792 brought the inception of the US dollar.
The US dollar was originally in the form of commodity money
in the form of gold, silver and copper coins.
The coins were actually made from real gold, silver and copper,
and the value of the metal that made the coins
were exactly equal to their face value.
The country then moved onto a mixture of commodity
and representative money with the 1900 Gold Standard Act.
The government issued dollar bills
which could be exchanged for gold at any time
Gold Standard is a type of representative money
that many countries used at the time.
This was an effective way to accurately calculate the exchange rate between countries
For example, if one gram of gold costs £1 in Britain
and $ 1.50 in America,
then you can easily deduce that £1 equals $ 1.50.
Gold coins were discontinued
effectively ending commodity money.
In 1971, Richard Nixon officially abandoned the Gold Standard
and the US moved onto fiat money.
So today money isn’t back by gold
or anything else of value for that matter.
So back to the question at hand;
basic economics tells us that an increase in supply,
results in a fall in demand and therefore a fall in price.
So the more money in the economy,
the lower the value of each dollar.
Meaning other countries can purchase more dollars in exchange for their currency.
A second supply and demand graph shows
why this leads to a rise in prices.
More money in the economy causes a shift in the demand curve for goods and services,
but since this isn’t matched by in increase in economic output,
prices must rise.
Look at it this way, if the government printed
a million dollars and posted it to everyone in the country,
causing everyone to go out to buy a sports cars…
but there’s only a finite number of sports cars in the country.
so the logical thing to do is to increase the price of a sports car.
If we use an analogy to demonstrate this:
imagine there’s 4 people on a desert island,
they each have 10 pieces of fruit each.
All fruits are considered equal in value.
Now imagine they discover a whole forest of apple trees.
The nominal value of apples has increased
because there’s more of them,
but the actual value of an apple has gone down
due to an increase in supply.
Therefore it now costs 10 apples for 1 banana
since demand for apples is low, but high for bananas.
Just to clarify, in this analogy,
the people represent different countries,
the fruits their respective currency, and the apples tree is the printed money.
But it’s not only because of economic theory
that we know printing too much money is bad idea,
there’s several examples throughoutrecent history.
The most recently example is Zimbabwe, who,
in 2008, suffered extremely high inflation due to printing money.
This was the result of some awful decisions
by the president Robert Mugabe.
When the economy took a turn for the worse,
Mugabe printed more money to pay government expenditure.
This caused inflation to skyrocket and
in mid-November 2008, Zimbabwe’s inflation peaked at…
actually wait hold on a second,
first I need to provide some context.
Inflation in the United States is around 2 %,
economists generally agree that inflation
level around 1-3% are optimum.
First-world countries’ inflation rates today range from 0-5 %.
A country is said to have enter hyperinflation
when their inflation levels exceed 50 %.
So, with that in mind, Zimbabwe’s inflation, at its peak,
reached… 6.5… sextillion %.
Or to put it another way… that number has 22 digits.
It got so bad that prices doubled every 24 hours.
The government tried to solve the problem
by printing more and more money with higher and higher denominations.
They also kept knocking zeroes off the end
by re-valuing the Zimbabwean dollar 3 times,
going through 4 different types of currency with 4 different ISO codes.
Before the final re-denomination, they were printing 100 trillion dollar bills.
People were literally using wheelbarrows full of cash to buy a loaf of bread.
The government even made inflation illegal at one point
and people were actually arrested for raising prices.
In 2009, the Zimbabwean dollar was abandoned
and to this day they still have no national currency,
their people use currencies such as
the US dollar, the Pound Sterling, andthe Euro.
Before the hyperinflation, the first
Zimbabwean dollar was worth about 1.25 US dollars.
If that 100 trillion dollar bill
was worth that exchange rate,
that single bill would be worth more money than there
is in the entire world… twice.
But as ridiculous as this was,
this is only considered to be the second worst inflation in history,
after Hungary in 1946.
Although Zimbabwe’s inflation peaked in Mid-November of 2008,
their overall highest monthly inflation
was 79.6 billion %,
whereas Hungary’s highest monthly inflation which took place in July, 1946
was 41.9 quadrillion %.
With prices doubling every 15 hours.
To put that into perspective,
a country with a healthy inflation level of around 3 %,
prices double every 23 years.
Their currency was called the pengo, and as
inflation rose, the bil-pengo: short for billion pengo.
Which is actually one trillion pengo on the short-scale.
As well as the record for the highest monthly inflation,
Hungary also holds the record
for the highest denomination banknote ever issued
– the 100 million bil-pengo note.
(ie – 100 million billion, or 100 quintillion).
which is 100 quintillion pengo on the short-scale.
1 milliard bil-pengo were printed but never issued.
In 1941, the exchange rate was
about 5 pengo to 1 US dollar.
In 1946, when the currency was discontinued,
things had gotten so out of hand
that if you took every single banknote
in the entire county, they would have a total value…
of one tenth… of a US penny.
Hungary then switched to the forint,
where 1 forint equalled 400 octillion pengos.
That number has 29 zeroes.
So that’s why government can’t just print money to pay off their debts,
it does not end well.
It’s also important to understand exactly
what national debt is.
National debt is muchmore complicated than personal debt.
It isn’t simply a case of you owe people money’.
Take the country with the highest National Debt
– the United States,
that currently has around 17 trillion dollars of debt,
and you’re probably aware the country holds most US debt is China.
Although that is true, it’s somewhat misleading.
Of the total debt, China onlyhas about 8%.
Most of the debt is actually
owned by the United States government itself,
by organisations such as Social Security or the Federal Reserve.
On top of this, a further 30% is owned by US citizens.
And even though 8 % of 17 trillion is still a lot,
China can’t just knock on the door of the White House
and demand 1.2 trillion dollars.
It doesn’t work like that.
Basically, the US Department of the Treasury issue treasury bonds.
You can buy these bonds
and the government will pay you interest on that bond every year, then,
once the bonds have matured,
they’ll buy the treasury bonds back from you.
Now, if a country gets into financial trouble,
it may have to default on its debt, which
basically means you won’t get your money back.
But the US is generally considered an extremely risk-free investment
because the US dollar is the most widely used and the most trustworthy currency in the world
It’s even written into the Constitution that
the United States cannot default on its debt.
I’ll leave you with this final thought and
what I think is possibly the best way to sum up
why governments can’t just print off unlimited amounts of money？
” If money grew on trees,
it would be as valuable as leaves”
Thanks for watching!