Print More Money, Inflate the Economy

The Lebanese Central Bank printed nine tonnes of cash in 2019 to address the looming financial crisis and cover the debts of its banks and treasury (Yassine, 2019). In the meantime, according to Ernst & Young (EY)´s report called Inflationary Economies, Lebanon´s annual inflation rate reached 215%, as of February 2020 reflecting on Lebanon's local currency which has lost more than 95% of its value. However, one may wonder what is wrong with printing more money in Lebanon to deal with all financial hardships and gain the country's wealth. The response from the economists Rupal Patel and Jack Meaning (2022, p. 191) from the Bank of England will be too much inflation or also known as hyperinflation. They state that central banks cannot just keep continuing to print more money as it will drastically increase the price of goods and erode the value of the newly printed banknotes. At the same time, the economists from the Bank of England also recognize the necessity of balanced inflation to increase the activity in the economy.

Inflation is one of the most well-known words in economics and has built up a lot of headlines: the eurozone hit a 10% annual inflation rate, the first time reaching double digits and the annual inflation rate in the U.S. constituted 8.2% (Trading Economics, 2022). According to Ceyde Oner, a deputy division chief in the International Monetary Fund's (IMF) Finance Department, inflation reflects the cost of the relevant set of products and/or services that has increased during a specific period, usually 12 months (n.d.). Commonly, when the general price of goods increases due to inflation, the purchasing power falls as people cannot afford certain goods for a given amount of money. President Gerald Ford in one of his speeches even declared inflation as a number one public enemy (Mihm, 2021). This article explains the correlation between inflation and printing more money.

Figure 1: Printing more money will eventually lead to higher inflation

To better understand the correlation between inflation and printing more banknotes, it is crucial to acknowledge the term inflation. According to the European Central Bank (ECB) (2022), inflation is a broad increase in the prices of goods and services, not just of individual items. It means, if one dollar could afford two bananas today, tomorrow one dollar could buy only one banana as the price has gone up. In other words, inflation depreciates the value of the currency and the purchasing power erodes (ECB, 2022). To get a full picture, let's take an instance of the commonly purchased item, a normal cup of coffee, and compare its price from one period with another. The average cup of coffee costs 25 cents in the 1970s and $1.59 in 2019. So for five dollars, one can buy three cups of coffee in 2019, while one could purchase 20 cups in 1970 (McKinsey & Company, 2022). This condition is caused by inflation and extends to all sectors of the economy. However, the prevailing consensus among economists is that economic progress requires a modest, consistent level of inflation, even though it may eventually reduce the purchasing value of your money (Tretina, 2022). With a consistent inflation rate of two percent, both households and businesses may borrow, invest, and save money with confidence (Tretina, 2022).

In the U.S., the Bureau of Labor Statistics (BLS) uses the most commonly cited measurement of inflation, the Consumer Price Index (CPI) to measure price fluctuations that urban consumers experience (Salwati & Wessel, 2021). Every month, 80,000 items from a fixed basket of goods and services - including everything from groceries and cable TV - are used to calculate the CPI. This basket represents the everyday purchases made by Americans. The BLS refers to the Consumer Expenditures Survey, a survey of American families choosing which goods belong in the basket and how much weight to give to each item. Each month, the BLS conducts two opinion polls to gather pricing information: one records the cost of the majority of products and services, and the other the cost of housing. To identify the price of goods and services, the data collectors contact various stores across the country and keep track of it each month. For housing prices, through in-person visits or phone conversations, the BLS gathers the prices of 50,000 tenants. Since the housing costs are not changed frequently, the data is conducted two times a year. This is the typical way to keep track of the percentage change in the CPI over a certain period to identify consumer price inflation (Salwati & Wessel, 2021).

Figure 2: Prices for goods and services keep increasing as inflation hits the record numbers globally

Furthermore, the Stanford economist John Taylor delivers that high inflation is caused when the monetary policy is too easy, for instance, when the interest rate is too low or the money supply is growing rapidly, also known as the quantity theory of money (Stanford, 2022). According to the book Can’t We Just Print More Money?: Economics in Ten Simple Questions, central banks cannot print more money without any limit as it will cause too much inflation. Simply, flooding the economy with new cash will end up in consumers spending and demanding more goods and services, but the production capacity is still at the same level with no reaction to the drastic demand, businesses just raise the prices (Oner, 2022).

Throughout history, several countries went through radical consequences of printing more money. Weimar Republic created in Germany after World War I printed absurd quantities of money to address their financial difficulties (BBC, n.d). People would use the German mark, their unit of currency, as wallpaper and firewood because it had lesser value than those items. In 1918, a loaf of bread cost 0.5 marks, but by 1923, it was 200 million marks. There was a high demand for products, but due to the limited supply, businesses were forced to increase the price of goods which led to the lost value of newly printed cash (BBC, n.d). Similarly, Zimbabwe experienced high inflation since the 1960s, but in 2007 and 2008, there was a significant uptick that led to the second-highest incidence on record (Munemo, 2022). Again, the main cause of the price increase was an expansion of the money supply. People in Zimbabwe become poverty billionaires, possessing vast sums of money with little to no value. The Treasury issued notes with a maximum denomination of $100 trillion which is still not enough to purchase basic groceries (Africa News, 2022).

Figure 3: Zimbabwe´s one of the biggest banknotes

Previous paragraphs explain, printing more money cannot deal with the financial struggles, oppositely will create more costs, an economic crisis, and in extreme cases, could lead to the collapse of the currency. The acute examples of the economic crisis in Germany after World War I and the irrational number of inflation spikes in Zimbabwe depict the importance of demand and supply balance in the economy. If central banks start penetrating more money into the economy, the supply of goods and services will not be able to meet unusually increased demand coming from consumers causing higher inflation and value depreciation. Therefore, it is crucial that sustainable monetary policies are adapted to manage the economy.

Nevertheless, not in all cases, inflation is harmful. Inflation must be sustained at two percent and kept under the control of central banks to drive activity in the economy. Keeping the balance is the key.

Bibliograpical References

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Munemo, J. (2022, July 27). Inflation is spiking in Zimbabwe (again). Why high interest rates aren’t the answer. The Conversation. Retrieved October 15, 2022, from https://theconversation.com/inflation-is-spiking-in-zimbabwe-again-why-high-interest-rates-arent-the-answer-187362.

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Visual Sources

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European Business Magazine. (n.d.). Prices for goods and services keep increasing as inflation hits the record numbers globally [Illustration]. Retrieved from: https://europeanbusinessmagazine.com/business/pay-awards-stagnate-as-even-higher-inflation-looms/