Where do we go from here, fellas?
Lately, President Rodrigo Duterte said the government would resort to borrowing money abroad so we can keep our economy going.
The question is: Why can’t the government, through the Central Bank, just print more money to solve our economy problem as a results of the billions of expenses that the government incurred during the Covid-19 crisis? Or why can’t the government, particularly the Central Bank of the Philippines, just print trillions of P1,000 bills and give them to all the poor people?
Well, we cannot just make more money by turning our Central Bank into a moneymill.
Here are the reasons why:
First, because that would make all the rich and middle-class people angry, and they would surely demand to be given those bills too.
Second, giving poor people tons of money won’t guarantee that they’d spend it wisely. If having millions automatically guarantees you’ll stay rich for the rest of your life, then why do some lottery winners go poor?
Third and probably the main reason why you can’t just print money and give it to everyone is because hyperinflation will happen.
Imagine that you’re an entrepreneur who runs a restaurant in a small town. One day, Henry Sy arrives and gave everyone 10 million pesos. Suddenly, everybody starts eating out because, who wouldn’t?
Your restaurant will probably be so busy catering to all the hungry townspeople that you would be forced to work harder than you usually do to keep up with the influx of customers. But you don’t want to work harder because you too, of course, received 10 million pesos. So what do you do?
The easiest solution is to raise the prices of your food. What used to be your P80 plate of spaghetti, you would probably now sell for P800 because you know people can afford it, right? From P80 to P800 – that’s a 1,000% increase in price! And what just happened, in a nutshell, is what you call hyperinflation which means, if the government starts printing more money and gives it to everyone, then the prices of goods and services in the country will dramatically increase and the value of our currency will drastically fall in the global market.
To further explain, the quantity of money circulating in an economy affects both micro- and macroeconomic trends. At the micro-level, a large supply of free and easy money means more spending by people and by businesses. Individuals have an easier time getting personal loans, car loans, or home mortgages; companies find it easier to secure financing, too.
At the macroeconomic level, the amount of money circulating in an economy affects things like gross domestic product, overall growth, interest rates and unemployment rates. The central banks tend to control the quantity of money in circulation to achieve economic
Take for example the situation of our country when it was under the Japanese regime. The Japanese government occupying the Philippines during the World War II issued fiat (authorized) currencies for general circulation. The Japanese-sponsored Second Philippine Republic government led by Jose P. Laurel at the same time outlawed possession of other currencies, most especially “guerilla money.”
The fiat money was dubbed “Mickey Mouse Money” because it is similar to play money and is next to worthless. Survivors of the war often tell tales of bringing suitcase or bayong overflowing with Japanese-issued bills. In the early times, 75 Mickey Mouse pesos could buy one duck egg. Then in 1944, a box of matches cost more than 100 Mickey Mouse pesos.
In 1942, the highest denomination available was 10 pesos. Before the end of the war, because of inflation, the Japanese government was forced to issue 100, 500 and 1000 peso notes.
In other words, printing more money doesn’t increase economic output – it only increases the amount of cash circulating in the economy. If more money is printed, consumers are able to demand more goods, but if firms have still the same amount of goods, they will respond by putting up prices.
This explains why hyperinflation occurs, fellas.
This happened recently in Zimbabwe, in Africa, and in Venezuela, in South America, when these countries printed more money to try to make their economies grow. As the printing presses sped up, prices rose faster, until these countries started to suffer from hyperinflation.
When Zimbabwe was hit by hyperinflation in 2008, prices rose as much as 231,000,000% in a single year.
So, what should governments do to progress? To get richer, a country has to make and sell more things – whether goods or services. This makes it safe to print more money, so that people can buy those extra things. If a country prints more money without making more things, then prices just go up.
But one little exception is the United States, a country that is already very wealthy. This is because most of the valuable things that countries around the world buy and sell to one another, including gold and oil, are priced in US dollars. So, if the US wants to buy more things, it really can just print more dollars. Though if it printed too many, the price of those things in dollars would still go up.
How about in countries like ours, fellas?
Of course, poorer counties can only print their own currency, not US dollars. And if they print a lot more, their prices will go up too fast, and people will stop using that money.
But it’s not true that a country can never get richer by printing money. This can happen, if it doesn’t have enough money to start with. If there’s a shortage of money, businesses can’t sell enough, or pay all their workers. People can’t even borrow money from banks, because they don’t have enough either. In this case, printing more money lets people spend more, which lets companies produce more, so there are more things to buy as well as more money to buy them with.
In 2008, there was the Global financial crisis, when banks lost a lot of money, and couldn’t let their customers have it. Luckily, most countries have central banks, which help to run the other banks, and they printed extra money to get their economies moving again.
Too little money makes prices fall, which is bad. But printing more money, when there isn’t more production, makes prices rise, which can be just as bad. No wonder economics – the study of money, trade and business – is often called the “dismal science.”
So, why can’t our president just order the Central bank to print lots of money for our economic recovery?
Well, that’s for our economists to decide because they have to protect also our countrymen from the hyperinflation that it might produce.