The currency is just a piece of paper. This is why people in crisis have often wondered why the government can’t simply print money to solve their money troubles.
Economists have warned time and again against the urge to create more money. People will have more money if there is too much government money. Consumers would want more, and the supply would not be able to keep up with the sudden increase in demand. Hyperinflation is possible when prices rise due to high demand.
Because the government mistreated the currency as its piggybank, 2008 saw inflation rise to 231,000%. A sweet that cost one Zimbabwean dollar previously was worth 231 million Zimbabwean Dollars a year later.
However, these rules do not seem to be applicable to all.
During the pandemic, the US Federal Reserve released $3 trillion. In three and a quarter months, the Fed’s balance sheet grew from $4.16 trillion up to $7.17 trillion. This was further increased by Biden’s “Inflation Reduction Act” in April 2022. In other words, the United States was printing money to provide Covid-19 stimulus.
Many economists believe that the current inflation is due to the government’s Covid relief package. However, it isn’t as severe as the one experienced in Zimbabwe. Anti-war intellectuals also accuse the Fed of financing US misadventures elsewhere in the Middle East and the rest of the world through the printing money.
Similar to the previous point, governments are always cautious about their public debt increasing too much. Economists warn that the debt-to GDP ratio should never exceed 100%.
However, the US’s current debt-to GDP ratio (2021) is 124.9%. Unsurprisingly, the US has not shown any signs of implosion while Bangladesh, despite having an average debt-GDP ratio (20.8%), is always concerned about a Sri Lanka-like disaster.
It begs the question: How can the US print money while developing countries are unable to do the same? How can the US continue to raise the debt ceiling while we are not?
Evidently, the answer lies in the unipolar US hegemony of the global political and economic system, and, more specifically, the role of the dollar as the global currency.
Global US Hegemony
Around 60% of world trade was denominated dollars as of 2021. The global demand for the US dollar is sufficient to absorb the short-term surplus supply.
Dr Ahsan Mansur, the Policy Research Institute’s Executive Director, stated that the US dollar is the world’s currency. Global trade is dominated by the US dollar. All central banks keep it in foreign reserves. This allows them to have an excessive supply of money.
It is important to also consider how the US and its allies got to such a dominant position, and why it is so hard for developing countries to attain that level.
After WWII, the United States emerged as an economic powerhouse as Europe and the rest the world were reeling from the destruction of war.
Because of its economic and geopolitical importance, the US was able to play key roles in the creation of Bretton-Woods Institutions, such as the World Bank and the International Monetary Fund, and the Generalised Agreement on Trade and Tariff, or GATT (predecessor to the World Trade Organisation, WTO).
The US’s dominance in global commerce would see it surpass pound-sterling to become the global currency. This would be further exacerbated if the World Bank or the IMF provided development assistance and, more importantly, loans to the developing countries in dollars.
The GATT was also founded around the same time. Its spiritual successor, the WTO, would continue to do the US’ bidding. Members are often forced to open their services sector (example: Nepal). This lowers tariff barriers that were erected to protect domestic industry, but allows developed countries to keep large aggregate measures of support (AMS), in agriculture.
The Marshall Plan allowed the US to also rebuild the economic systems in Japan and Germany. These two largest economies are still close allies of the United States. It was not surprising that the majority of the world’s economy became dependent on the US dollar. This gave the US and its Federal Reserve the freedom to be a little more reckless with their currency.
The least developed and developing countries have little influence or demand on the international currency market. There are a few exceptions such as India, Russia, China, India, etc. Even so, the majority of them hold such a small amount of global reserve that they can’t afford to print money or borrow what they want.
Dr Selim Raihan (Executive Director of the South Asian Network on Economic Modelling, SANEM), agreed.
“The global economy has a high degree of inequality with the US having disproportionately greater influence over international trade and multilateral institutions.” Dr Raihan stated that even the majority of global debt is in US dollars.
He said, “Starting in such an unjust position, it is difficult to generate enough demand on the global market for their currency to cushion their national economies from inflationary pressure.”
The US Federal Reserve should be allowed to increase the money supply during times of crisis as long as it remains the global currency (i.e. global trade, debt, and official development assistance) provided the increase is within a certain confidence period.
The bizarre case of European Union
Despite being the second most powerful global currency, the Euro (EU), the European Union cannot be the same flexible as the Euro in terms of money supply because it is multilateral.
Dr Raihan stated that everyone expected the Euro would be able to compete with the US dollar as a global reserve currency. Euro isn’t very attractive as a reserve currency due to its governance structure and economic strength.
The Euro is also odd in many other ways. As part of its Quantitative Easing Programme, the European Central Bank has printed over 600 billion euros per month in the twelve months that have ended March 2015. Because of years and low inflation, the EU was unable to achieve this feat.
Even then, it was a disaster. The inflation did not rise by 0.1%. This was because the banks refused to lend the printed money and the small and medium-sized entrepreneurs did not try to get loans. The hundreds of billions of euro that were pumped into European economies remained in the banks.
This is contrary to the belief that inflation can only be caused by printing money. The rate of inflation rises only if the money supply contributes to an increase in aggregate consumption.
Can the US print money indefinitely?
It is not.
First, no matter how strong the US’s economic might, it can’t produce unlimited dollars to pay its leaders. Too reckless monetary policy could have devastating economic consequences.
In addition, countries in the developing world like India, Russia, China and China have already begun to look for alternatives to US dollars, given their recent experiences with the Russian invasion.
The central banks of the world, for example, have been on an unprecedented gold-buying frenzy. They purchased around 399.3 tons of gold between July and September 2022, a more than 400% increase over last year.
China knew about the risks of US Treasury bills being held long before the war. The US Treasury bills held by Chinese investors increased by only 0.2% in 2020, while the East Asian superpower’s reserve grew to 3.45%.
Dr Ahsan Mansur believes it was the diversification efforts of the rest of world that led to inflation in America, as the global market could not absorb the US dollar.
As more countries diversify their reserves portfolio with renminbi and euro, ruble and pound,
The Fed might need to be more careful about how it monetary policy in the future with other currencies that are majorly traded.