can’t we really print more money & get rid of economic deflation?
In every such scenario the economic experts may tell you “Inflation may increase” & it may be the end of the story. Since this is a topic arise from time to time, lets drag it from the terms of ‘Layman’,
What really money is?
The money doesn’t really have an inherent value. The value which visible, is only since we can buy commodities using them. And this effect is called “Tinkerbell Effect”.
For an example, think of a person who get stucked in an Island with a stash of millions of Dollars, the best use he can get from those currency papers is to lit them in order to prevent from cold.
Three main types of Money
- The Commodity , things like spices, horses, weapons, gold & silver were considered as commodity money due to their rare nature.
- The Representative , commodities like silver & gold which are difficult to carry-with all the time, can be deposited in a place like bank & a coupon can be obtained. This coupon can be used as money to buy goods & the final owner of this coupon redeem it from the bank or the place where deposited.
The Representative money of Gold, was really important in calculating the exchange rates within the countries.
For an example,
Consider the country named Sri Lanka which use rupees(rs.)as their currency.
If the price of 24grams of gold in Sri Lanka is rs. 10,388 and in USA if it is 54.17$, then the price of 1 USD in Sri Lanka will be rs. 10,388/54.17 that is merely rs.192/=
- The Fiat ,Base for fiat money depends on the trust of general public over their governments for maintaining the value of Fiat Money. Therefore, its value is not backup by silver or gold. Thus the whole world tends to use this as the money unit today.
Printing of fiat money and inflation
The simplest meaning of Inflation is,
The depleting the value of Fiat money, relative to the increase of price of commodities & services.
A basic principal of economics is,
“when supply increase demand decrease”, thus the price drops, if the government continues printing more money, the value of that currency further drops.
The next thing happen is the increasing the price of goods, let’s see how this happens.
When there’s more money in the economy, the demand curve for goods & services increase. But if this condition is not balanced by an economical output, the price of commodities may sky-rocket.
Let’s make this clear by an example,
There are 4 vendors who sell banana, apple, mango & orange. Each of them have 15 of these fruits respectively & value of each of them is same (value of 1 banana = value of an apple =value of a mango =value of an orange). In a while the yield of apple suddenly increase & it leads to the increase of the ‘Nominal Value’ of apple, however since the apple become more frequent, the supply become higher, thus the demand reduces, as a result ‘Original Value’ of Apple reduces. Finally, the price of 15 apples may equal to the price of a banana, a mango or an orange.
Can we print excess money then??
If you substitute 4 countries for the vendors in above example, each country’s currency for each fruit and printed extra money for the over yield of apples. You may understand whether the money can be printed in order to get rid of this crisis.
There were some countries which didn’t care about this basic principle and printed money to reduce inflation.
One such issue took place in Hungary in 1946.There inflation was around 41% then, in order to control the inflation, Hungarian government had to print 100 million valued “pengo”(currency used in Hungary) note, however it was uncontrollable & had lost its function as money, thus the government had to withdraw all the pengo currency notes over the country which merely had 0.01 value of USD & to abolish the pengo unit.
Printing money may not a solution to overcome the inflation or economic crisis . At least the inflation rate has to be maintain around 3% for a sustainable economy has to implement proper economic strategies for that.