I’m going to have the economists on these boards in stitches with this question, but I figure I’m not going to learn unless I ask…
How do nations decide how much currency to print? More importantly, why don’t poor nations just print more money? Now this is where I have an attempt at answering my own question…
Firstly, I’m assuming, is the issue of inflation. If governments just printed loads more cash and used it to buy stuff, inflation would surely go through the roof. Okay, fair enough. Secondly, I’m assuming the value of the nation’s currency would plummet?
Which leads to my next question - why, then, is foreign aid effective? If country A gives country B a billion dollars a year, then isn’t country B going to be effected by inflation just as if it had printed a billion dollars itself? How about its currency - will its value be affected? I suppose not, as the supply of country A’s currency is increasing, not country B’s. But that doesn’t explain the inflation part…
And speaking of the inflation part (I promise, this will be my last economics question), why can’t nations just print more money to pay off their foreign debt? The money won’t be entering their own economy, so I assume it won’t affect inflation?
OK, I’ll take part of this. I have a bank balance of $1001 and write you a check for $1000. Now, my bank balance is one dollar and your bank balance has increased by $1000. You’re better off because no new currency was created.
A nation’s foreign debt isn’t owed in their own currency. “Hard” currencies are those currencies which are traded in open markets and have value in relation to each other.
Here is just one quick cite I found for Germany’s hyperinflation after WWI. They kept printing money and it became more and more worthless.
On the issue of foreign aid, if County A gives $1 billion to Country B, presumably it’s delivered in the currency of Country A. When Country B goes shopping for useful items like tools, fuel, food and whatnot in the stores of Countries C, D and E, those nations will be glad to accept Country A currency instead of Country B curreny, becuase Country B is obviously one fucked-up place.
Of course, this is actually done through bank transfers and not dollar bills changing hands.
As for printing more currency, currency by itself is useless paper. It needs to be backed by something stable, be it stores of precious metals or the deposits of productive citizens who have reason to trust the banks won’t be looted by a kleptocratic government. A country could run the printing presses into the ground cranking out new bills (or just print a single note with a $1 trillion face value) but they can’t pay off their foreign debts if the creditor nations laugh in their faces and demand something of actual value instead.
For that matter, when the US sends ten billion dollars in aid to Upper Elbonia, it isn’t usually in the form of money at all. Much more often, what that means is that the US is sending ten billion dollars worth of wheat, technology, and man-hours. So Upper Elbonia is definitely getting something out of the deal. Unlike the currency example, Upper Elbonia would also benefit if they themselves were producing more wheat, but unfortunately, it’s a lot harder to grow more wheat than it is to print off more bills.
And isn’t it also part of the international economic equation that if Country A sends one bazillion of its dollars to Country B, that Country B can then use those dollars to buy stuff from Country A, thereby moving that money back to Country A and enriching Country B by the value of what they imported. In fact, maybe that’s another version of what Chronos was saying. xo, C.
To put it another way, printing more money slices the pie finer and finer upon each printing. Inflows of foreign aid actually take slices from Country A’s pie and adds them to Country B’s existing pie, resulting in a slightly bigger pie.
Regarding foreign debt, any money that is created out of nothing (either by printing, of by the central bank giving away credits for virtually free) will sooner or later enter the national economy. If Elbonia is printing a billion piastres to pay off its foreign debt, what will the debtors do with that cash they received? They use it to buy Elbonian products (or sell it to someone who needs it because they want to buy Elbonian products). Sooner or later, the money will flow into the Elbonian economy, causing inflation rates to go havoc.
That’s exactly, btw, the reason why nations reputed for having little discipline in managing their money supplies usually borrow in foreign currency, not their own: Debots want to see hard cash, not the close-to-worthless pieces of paper with lots of zeroes written on them the natives use to buy chewing gum.
In the end, it all comes down to a relation of money supply and commodity supply: If you increase money supply without an equivalent rise in products that money can buy, then the purchasing power of each piastre will go down.
Stop thinking about money as having value and only stuff and services as having value. You can print up more money, but you won’t have added any value to the economy. What you have done is made money “cheaper” by it being less scarce.
I have a couple of 1,000,000 zaire notes I got when I was in that country there in 1993. Each one was worth about $1 US at the time, because Mobutu just kept printing money. I believe they issued even larger notes later on as the currency’s value continued to plummet. Serious problems really began when the soldiers started to refuse to accept their pay in zaires.
Colibri’s First Rule of Economics: Any country where you have to be a millionaire to buy a beer is in serious difficulty.
This is a very complex answer, dependant on the monetary policy and the social policy of the state (national government). Typically, a government’s governing bank institution (for the US, it is the Federal Reserve, or “the Fed”) decides how much money to print based on 2 traditional systems of money (there are more, but those are less common and may confuse the topic): 1) Fiat Money - print money based on the productive capacity of its economy; and 2) Representative Money - print money based on the amount of intrinsic value of some precious commodity in the bank’s (used generically, e.g. US is the Federal Reserve Bank [which may be a bad example, because the US is based on fiat money] reserves which are, in modern times, based on gold, silver, or US dollars. This is all a massive simplification, of course.
Not just inflation, but hyperinflation. So, not only do you have the rocketing prices of goods and services, but value of the currency is plummeting (to answer your second question, but not always, though it’s rare when it doesn’t). But – wait, there’s more! Hyperinflation causes extreme hording and consumption of assets and commodities (think assets = production facilities; commodities = food stuffs, daily needed supplies); i.e. producers will shut down production because they don’t have a handle on what to charge or to pay employees; long lines at the stores for bread, eggs, and milk, even if not needed, because the prices are rising and people do not know if there is going to be additional supply. Also, if the money was backed by something, that will flee the country. Investment of any type is halted, fearful of entering that market.
I’m not sure of the actual detailed logistics of aid given from one country to another. The aid comes in many different types and venues, but it definitely isn’t supplanting one currency for another. Aid can be debt relief, foreign investment, or direct payments of one country by another. Unless the government is the one actually buying goods for itself (wheat, bread, lumber, steel), then the market price theoretically shouldn’t see any inflationary concerns. [I won’t get into the controversies behind aid relief.]
If a country prints more of its own money, regardless of what value is behind it, then the value of the currency will drop. There is this concept of a foreign exchange market (basically, a market for currency) in the global scale. The market will know if the country is just haphazzardly printing money and will punish that currency by devaluing it on the market. This has a huge effect of creating trade imbalances (in a bad way), debt increases, and generally devaluing production in that country. This will, in turn, cause a lack of investment, fleeing of capital and people, and push that country closer to the third world (in extreme examples), or the equivalent to the aftermath of a large manufacturer leaving a small town.
[wow, a lot of responses as I get back from my late lunch, sorry for any repeat information]
To be more precise, what’s usually sent is more like Gift Certificates, redeemable only in the country sending. In other words, when the U.S. gives $1 million of foreign aid to Elbonia, what it means is $1 million of grants that have to be spent buying things from U.S. businesses.
This brings up something I’ve never understood. How do different countries exchange rates work? Every day on the business radio I hear “the dollar closed up (or down) against the yen, euro,” etc. etc.
Having all the rates pegged to other nations’ rates seems circular. Is there some central governing body? Maybe it’s an international money-trading market, but that seems like a very unstable way of doing things.
Who decides all this? Especially since the US (and for all I know everyone else) is no longer on a precious metal standard. An earlier post mentioned that the value of a nation’s currency could be based on “productive capacity of its economy” - who makes that measurement, for one country or across all?
Slight hijack, but I just want to point and laugh at the word “kleptocrat.” After reading it in your post, and then after laughing hysterically for almost a whole minute, I looked it up to see if it was something you just made up or if it was in common use. After finding it in UrbanDictionary, I began wondering how I ever did without it, and I decided to use it every day.
There is a market for currency of every country out there. Money is traded on the foreign exchange market. With every market, there is a bid and ask price. Simply stated, price fluctuations within the market are due to investors/traders of the currency and how they feel the market is going to perform in the future, and the current supply and demand for the currency.
However, that’s not what is really happening. Some nations (like the US) have currency that is free floating. Other nations have their currency backed by gold. Other nations have their money backed by other national currencies (a lot of countries were pegged to the US dollar). The fluctuations of the currency exchange market is governed strictly by market forces and the trading rules in the country you trade in.
The government, in some form or agency, makes the determination of its economic output. Other banks and financial institutions make their own assesments. By and large, the measurement is through GDP. The GDP of a country is directly tied to the value of its currency. Other factors include the buying and selling of currency by large multinational corporations (MNC). Like I stated in an earlier post, if the comparative ratings of a certain currency are trifled with by the government, the market (traders, investors, MNCs) will punish that currency.
At first, I thought you must have been asleep for the last 10 years or so, but I see your location probably rules out constant awareness of U.S. issues. Although I think that particular issue got pretty wide-spread coverage and there has been a good deal of literature and press involvement with the concept.
Ultimately, except for currencies like the US dollar, a currency is used to buy products or service from the country that issued it. Taking the example mentionned above, if I’m sitting on a pile of zaires, I can only use it to buy something in Zaire (Congo, whatever) or sell it to someone who wants to buy something in Zaire.
So, if Zaire prints plenty of banknotes while there’s not much to buy with it, it will result in massive inflation (if there’s twice as much money floating around and nothing more to buy, prices will just become twice as high). On the other hand, if Zaire receive foreign aid in dollars, or in some other currency, this money can be used to buy products from other countries. So, there might still be twice as much money, but you can also buy twice as much existing products with it, by importing what’s missing. So, there’s no inflation (actually, if the aid really comes in the form of money and if it’s truly massive, some of it will be spent locally so there could be a rise of inflation).