Just print more money.

by Nguyễn Anh Trâm và Phạm Gia Phú

Why don't banks print more money to make our country richer?

Surely we have all asked the question that if the state produces more cash, isn’t it true that everyone has more money to spend, leading to a better life, making each person richer, helping the country develop, right? Why are other countries in the world not doing the same? Sounds reasonable, right? But... When you delve into economics, the answer is very clear.

Let's put ourselves in a hypothetical situation, holding all other factors constant - also known as "ceteris paribus". Suppose the central bank prints a lot of money and gives it directly to the people. People's income increases, financial difficulties are temporarily resolved and spending in the economy increases sharply. At first glance, this seems to increase GDP and make the country more prosperous. But in reality, it's not that simple!

1. The economy does not just create more goods when we print more money. Printing more money only increases the amount of “waste paper” in circulation. It does not create rice, meat, etc. The actual amount of goods and services remains the same.

2. When everyone has more money, demand begins to increase sharply. Many people want to buy more, but businesses cannot immediately open more factories, hire more workers, or increase production. Demand increases too quickly, while the economy's ability to supply increases very slowly.

3. When demand exceeds supply, businesses are forced to raise prices. Prices increase not because goods are better, but simply because the amount of money is chasing the same amount of goods. This is demand-pull inflation - a very common form of inflation.

4. Inflation begins to spread throughout the economy. When prices of many goods increase simultaneously, the real value of money decreases because each bill buys less goods than before. Although people have more money, their real purchasing power is lower. There are consequences such as money saving becoming worse due to devaluation, real wages decrease. Confidence in the local currency begins to decline.

For the four reasons above, the economy becomes weaker instead of stronger. We do not get rich by printing more money, but only by making money lose value faster than it can produce real goods.

The Zimbabwe $100 trillion note is the result of hyperinflation caused by printing too much money. The $100 trillion is actually worth 40 cents USD

Zimbabwe in 2008 is a classic example of “why printing more money is bad”. They kept printing more money and the result was that prices increased by 89.7 sextillion percent a year on November 14 [1]. All because of the poor fiscal management policies of the Zimbabwean government that ruined the country’s once good economy [2]. People had to carry sacks of money just to buy a loaf of bread. In Germany in the early 1920s, in order to pay for World War I reparations and pay for expensive social welfare programs, the government ran the printing presses at full capacity. As a result, the mark lost its value rapidly, a loaf of bread that cost only 163 marks in December 1922 cost up to 201 billion marks in November 1923 [3]. The situation was so bad that the government had to carry out monetary reform by converting to new marks with 12 zeros removed from their face value [4].

Of course, this does not mean that the central bank does not print money. They still do, but they did it in a controlled manner. In addition to printing money, the central bank also had many other policies to control inflation such as selling reserve assets (e.g. gold, foreign currency, land, bonds), increasing interest rates for commercial banks to borrow and tightening the money these commercial banks could lend. The policies above reduce the amount of money in circulation, thereby keeping inflation stable at the target level set by the state or the central bank itself according to the economic situation. A low and stable inflation rate, usually around 2 - 5%/year, actually has more benefits than harm. It encourages people to spend and invest, helping the economy grow sustainably. In particular, they do not let the economy fall into deflation, because deflation is more dangerous than inflation as deflation causes businesses to stop investing, people to delay consumption, causing the economy to stagnate, and to avoid deflation, increasing the money supply through money printing policies is necessary.

In short, printing more money does not make the country richer. It only creates a pile of waste paper in circulation without increasing the number of available goods. What makes a country more prosperous is labor productivity, technological innovation and the ability to produce more and more valuable goods

Economics is actually easier to understand than you think. See you in the next post of the project.

Citations:

[1]: Cato magazine (archived). "On the Measurement of Zimbabwe’s Hyperinflation." 2009.

[2]: "Weimar Hyperinflation."

[3]: Pfleiderer, Otto. "Two Types of Inflation, Two Types of Currency Reform: The German Currency Miracles of 1923 and 1948." Zeitschrift für die gesamte Staatswissenschaft.