Can the US Print MONEY Forever? Why hasn’t the U.S. Experienced Hyperinflation?
Can the US Print MONEY Forever The creation of money by governments and their central banks becomes a very appealing solution, especially in times of severe economic crises such as the one the world experienced in 2020 due to a pandemic. But history has shown that printing money in excess almost always ends badly. You don’t have to go very far back to know the consequences of turning on the money.
Printer, the best known and most recent example is that of Venezuela, where public spending began to be financed by the central bank with the issuance of bank notes. The result is that Venezuela experienced hyperinflation for more than four years, the country closed in 2020,
with an inflation rate close to four thousand percent, and this happens because if in a country, there is a certain amount of goods and in a short period, the amount of money in the economy increases prices will increase because there is much more money than before, but the same amount of goods.
Let’s think that most companies and factories cannot increase their production capacity immediately. So the only alternative to an increase in demand is to raise prices. The consumer tries to anticipate the price increase and quickly gets rid of money,
so the central bank must print more bills because they are used faster and faster, which generates higher inflation, and this cycle repeats itself. Now the question is: if the united states have issued trillions of dollars in 2020 and 2021, why has it not experienced hyperinflation?
What is the limit for the united states to stop printing money until a few decades ago,
the issuance of paper money was backed by precious metals such as gold, precisely to avoid abuse of that power to print money? This is known as the gold standard. This system demanded greater monetary discipline because the money supply set by the central bank corresponded strictly to the value of the metal reserves kept by the bank.
So anyone could go to the bank with that paper and exchange it for gold until 1971 there was a gold dollar standard in which the united states was committed to supporting the dollar with gold and in turn, other currencies were linked to the us dollar. In other words, if a banknote of a certain value was printed, it was because the bank had its value in gold as a backing.
However, we began to have problems, financing the Vietnam War and started to print much more money than we could back up with gold, which is why we decided to abandon the gold dollar standard from that moment on currencies would be backed only by the confidence that the whole world gives to the paper issued by central banks, the united states could now print money without the need to have its value in gold.
So it is not strange that, as if by magic, the federal reserve, the central bank of the united states, prints, billions, or rather digitally- creates money and injects it into the market in a matter of days, for example, it is estimated that in 2020 in just three months, the federal reserve injected three trillion dollars into the economy that money could buy all the goods produced by the united kingdom in a whole year.
This, bearing in mind that this figure only corresponded to mid-2020, but the trend of printing money continued until the end of 2020 and the beginning of 2021. In other words, the u.s can get money out of thin air without raising taxes, because the federal reserve prints money to buy debt bonds issued by the u.s treasury, then taking into account this enormous amount of additional money in the middle of the world crisis.
That is to say, with fewer goods and services offered.
How is it that the united states have not suffered hyperinflation in the case of Venezuela when its central bank printed bolivars all that money stayed in Venezuela but in the case of the united states since the dollar is the world’s reserve currency?
Not all dollars stay within the united states but are used in most countries and companies that usually make transactions in us dollars. In this way, the risk of hyperinflation is dissipated globally, because u.s dollars are not only demanded in the united states, but also in the rest of the world, and precisely inflation in the united states had remained below.
percent since 2012, and this low inflation is what had allowed Congress to continue approving stimulus packages, the last one of 1.9 trillion dollars, which included direct payments of one thousand four hundred dollars to the accounts of millions of Americans. That is why u.s borrowing backed by the federal reserve, is growing. So much government debt reached 29.6 trillion dollars, 123 of GDP in 2021.
This does not seem to worry Democrats and most Republicans for the simple fact that we are borrowing its currency, I.e, paying off its debt with the same currency. It can print. So the other question is whether there is any limit to the money issuance and massive indebtedness of the united states. The limit could be that another currency begins to replace our dollar as the world’s reserve currency, which is unlikely to happen in the short to medium term.
Other limits are that so many excess dollars effectively start to generate inflation, and this has already started to happen since May 2021. The inflation rate in the united states is the highest. It has been in 40 years, for example, the inflation rate in May 2022 was 8.6 over the same month of the previous year. This figure,
while still far from being considered even close to hyperinflation, is high for a developed country the concern about this figure for investors, companies and some politicians is that the federal reserve’s inflation target is two percent, so if inflation permanently exceeds its target, the fed could raise interest rates to increase the cost of borrowing and decrease consumption and, consequently, inflation. This is relevant because an interest rate hike amid an economic recovery can have multiple consequences.
In theory, if the federal reserve raises interest rates and the commercial banks follow suit, it becomes more attractive to leave money in the bank, because it is assumed that the higher the interest rate, the higher the yield, that is, fixed income, becomes more attractive and a consequence of this is that the debt bonds issued by the government will tend to offer higher yields.
In other words, the government will have to pay higher interest rates to get into debt. We could simply print some more money to pay that higher interest, but that would imply greater inflationary pressure. Another consequence of the rise in interest rates is the following: the federal reserve artificially kept the interest rate around zero percent.
For so long, many companies went into debt and are now considered zombie companies, that is many companies, became addicted to cheap money and sustained themselves only by paying very low interest on debt with higher interest rates, they could face serious financial difficulties or even go bankrupt. For these reasons, the issue of high inflation and the actions the federal reserve could take to contain it is so sensitive, so high inflation is the limit for the u.
to stop printing money and going into excessive debt. The question that remains is: how long can the rest of the world continue to rely on the us dollar as the world’s reserve currency?