Question

In: Economics

Why we cannot print money to pay back the debt

Why we cannot print money to pay back the debt

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Expert Solution

All the money we have today is fiat money, meaning it is not backed by any commodity like gold but retains its value based on trust in the government. Since they are not backed by anything, in the forex market their value depends on supply and demand. If there is more of one currency in the market, its value will be lower compared to others.

Money follows a basic supply and demand curve too. If there is more supply, its price (Value) will be less. Governments have target inflation, this is so that people will not just hoard their money in vaults of their basement but invest or lent them to keep the economy going. They do so by increasing the money supply more than the increased output of the country. Usually, healthy inflation is 1-3% and governments target this inflation rate If they just print money to pay off their debt, there will be more inflation and hence the government expenditure will be more which will be met by more printing of money.

When an economy's inflation rate is more than 50% in a year, it is termed hyperinflation and in history, many countries experienced it like Zimbabwe, where at its peak prices were doubling every 24 hours and the inflation rate was 6.5 sextillion %. Value in people's hands was vanishing by the hour without doing anything and that's why we don't print money to pay off debt.

If money grew on trees, it would be as valuable as leaves


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