Gentle reader, you may have seen on the news that the US economy has been experiencing the highest inflation in over four decades. Furthermore, the Ukraine-Russia conflict has further added to the world’s financial woes. With a newer Covid strains still inflicting deaths, the pandemic shows no signs of going away, only slowing down…

However, some speculations say that the following factors are only partially to blame for the current inflationary dilemma we find ourselves in. As a matter of fact, a big portion of the blame lies on the US government, which has been circulating large amounts of money. It seems the Fed has been printing money like there is no tomorrow, which is leading the economy to higher inflation.

What are the consequences of printing money going to have on the economy?

Are the Rumors True?

Earlier this year, in March, a post circulated on Facebook questioning the Biden administration of printing $8 trillion and accusing the government of blaming inflation on the ongoing war between Ukraine and Russia.

Multiple US citizens retweeted the post sharing their concerns over the rising costs of daily utilities like gas, rent, and food. Multiple justifications regarding the $8 trillion were provided on social media, causing confusion and uncertainty.

However, these posts are highly misleading. The data shows that the Biden administration has printed closer to $2 trillion dollars since they’ve been in office.

The Fed determines the amount of currency the Bureau of Engraving and Printing should print. After printing the money, it is distributed by the Fed to 28 cash centers, which then disperse it to the banks.

For the fiscal year October 2021- September 2022, the Fed ordered the printing of $325 billion dollars. For the current fiscal year, the print order ranges from $310 – $356 billion dollars.

This is up from about $200 billion in print orders back in 2019 and 2020, which were bolstered by the COVID-19 epidemic.

The volume is typically determined by the board’s forecast of future currency demand. According to the print order, this estimate is based on expected currency stocks, degradation rates of unsuitable notes, net payment trends, and other considerations.

How can Printing More Money Cause Inflation?

When a government prints extra money, it only increases its circulation. If the output does not grow in response, consumers will have more money to spare on the same services and products as before. This brings forth a rise in the prices of products and services, devaluing the money and causing inflation.

Let’s take a look at an example.

Assume the industry generates 1,000 output units, and the supply of money is $10,000. As a result, the average cost of the product will be $10.

Now, let’s assume the government has printed more money, bringing the total supply of money to $20,000. However, the output of the economy has not increased simultaneously and remains at 1,000 units only. What happens now is that people have more money to spend on the same number of items.

This causes firms to increase the prices of their products, so, referring to the example above, the cost of the item is now $20. This means that goods are getting expensive, inflation is rising, and the value of the currency is falling. What you could buy with a 10 dollar note before, you have to buy with $20 dollars. A $10-dollar note doesn’t have the same value it had before as it doesn’t buy the goods it used to before.

This means that the rise in national income is only monetary in nature, and the economy has not improved.

For instance, if output increases by 5% and the supply of money grows by 7%, The inflation rate will then be around 2%.

Complications of Inflation

So why does everyone fear inflation? Is it really such a bad thing?

The answer is “yes.” Inflation is horrible; it causes multiple problems for both individuals and the economy.

• Decrease in Value of Investments: inflation diminishes the value of your investments if you have cash holdings. This also decreases the motivation to create savings.
• Costs of Menu: This is the cost of frequent price changes. An increase in inflation causes difficulty in making transactions, and prices oscillate regularly.
• Uncertainty and Confusion: People become stressed as to where they should spend their money. Firms halt investment plans and future expenses, causing reduced rates of economic growth, declining competition, and reduced real incomes.

Additional Problems Caused by Printing More Money

In order to raise money, governments finance from private sectors through bonds or securities, which are a type of investment. Individuals prefer purchasing government bonds as they assume that they are a secure investment. This, however, is not the case, as returns on government investment require that inflation remains under control.

If the Fed resolves to print money to settle the national debt, inflation will increase, causing the value of bonds to decrease.

This would result in individuals not wanting to invest in government bonds or securities. Therefore, to finance the national debt, selling bonds will be complicated. To entice investors, the government may have to pay more interest.

Printing more money and high inflation will cause investors to lose faith in the government, making financing difficult. Therefore, printing money may only add to the economic problems of a country.

On the contrary, printing money doesn’t always have to cause inflation. During a recession with periods of depression, increasing the money supply won’t trigger inflation.

The reason behind this is that the supply of money is influenced by the speed of circulation as well as the monetary base. If the number of trading/transactions declines significantly, printing money may be necessary to avert deflation.

Wrap Up

Whatever the Feds do, they do it carefully, taking every risk under consideration, and printing money doesn’t literally mean “printing” money. The majority flow of money is not cash; it’s credit. This credit is the money that is deposited in banks.

As you can tell from the blog, printing money is no game; it has its many drawbacks that could lead to hyperinflation and probable destruction of the economy.