The Repercussions of Speeding up the (Currency) Printing Press!

The consequences of over-working the nation’s currency printing press, are not just limited to frequent repairs and costly oiling services (damn that’s expensive). The ramifications of such an exercise are counter-productive and can potentially put us all in a worse-off situation than before.

Take it from us, avoid the temptation of over-printing bills if you become the governor of a central bank.

What is Money anyway?

Money is a medium of exchange that helps us buy our favorite clothes, dishes and cars. However, things were different back in the day when people purchased goods by exchanging goods (i.e. barter system). For example, a cotton-weaver and a wheat-producer would exchange their respective produce to satisfy their needs. However, the barter system was tricky and problematic as the cotton-weaver found it difficult to find that specific wheat-producer who is also willing to buy cotton at that specific point of urge at an agreeable value. (This conundrum is dubbed ‘Double incidence of wants’).

However, having currency bills as a universal medium of exchange, the problem of conversion of value (whether 1 loaf of bread equals 2 kgs cotton or 10 kgs of cotton) is solved. Further, people can save their wealth in a universally accepted medium (imagine having to store your live savings in the form of cotton!).

Too-much Money Too-fast

The goal of the government is to improve the standard of living of the people which includes making people better-off (read richer) than before. So when every government has full access to the highly-priced printing machine, why not take full advantage?

As a hypothetical situation, imagine a political party lures the voters by promising $1 million for every citizen if voted to power. Now since all poll-promises are kept (pun-intended), every citizen receives a credit of $1 million. (Come out of your fairy land, we said hypothetical)

With all this money, people are rushing to buy the stuff they desire. Adam wants a Harley bike, Denise cannot wait to buy a LV bag, Richard is thrilled to be driving a Porsche very soon and so on (you get the picture ... Who says money can’t buy happiness?)

The problem is that the retailer for Harley Motorbike needs to be compensated more now given he too is a millionaire just like Adam. The maker of LV bags has to compensate his employees more as they too are millionaires. The maker of Porsche car is witnessing higher bookings and thus raises prices as demand for his cars exceeds the stock available (Recall Law of Demand - when demand rises while supply remains constant, prices shoot up).

The Devil Lies in Detail - INFLATION

By giving away a million dollars, the demand for goods rose sharply but that did not lead to consequential rise in supply (or output). Too much money chasing limited stock of goods, leads to rise in prices which in-effect hits the purchasing power of people. This phenomenon is called INFLATION!

Going by our earlier example, Richard needs to spend more money than before in order to own that beloved Porsche and thus his purchasing power has fallen i.e. people will not be able to buy more quantity of goods in spite of more money in their pocket due to inflation.

Is Printing a lot of Money that BAD?

Short answer – YES

Let’s note a history lesson. Zimbabwe’s decision to print more and more money to fund the interest obligations on its outstanding debt is a case study topic for all economic grad. students. The country’s central bank kept rolling new money in the system which led to unprecedented rise in prices and caused Hyperinflation. Hyperinflation is a severe form of inflation and is said to occur when prices for goods move up more than 50% in a single month!

Imagine your favorite chocolate box costing $ 10 in January, $ 15 in February, $ 23 in March and rising further in the following months (say goodbye to your monthly quota of Toblerone).

What causes Hyperinflation you ask?

During economic downturn, people sadly lose jobs and run down their savings. Thus, a central bank is tempted to put money in the hands of the people. However, this is not accompanied by growth in output (or rising GDP), and thus leads to demand exceeding supply by a very wide margin (the culprit again). Consequently, companies demand higher prices to maintain historical profits as inventory remains low. Now the consumers with more money in their hands pay the higher prices.

(Though no one asked but Germany, Venezuela and Sudan have all tried their luck with over-printing and paid heavy prices.)

So, what did we learn today?

- If you start working for a Central Bank, avoid the temptation of over-printing currency bills!

- When the value of currency in circulation increases without consequential increase in value of goods, the demand outpaces supply with a wide margin and inflation plays spoilsport. The worst form of inflation is dubbed hyperinflation and this is a nightmare for the country’s economists.

- If the value of currency in the country rises at the same rate as output (or stock), then inflationary pressure will be limited and manageable (Policymakers believe 0-2 % as an acceptable inflation target for developed nations).