What if...Governmnet Print more Currency notes & give it to the general Public to tackle Economic Crisis caused due to COVID-19 ?

The global manufacturing sector has suffered its worst contraction since the 2009 recession. While in the current scenario of COVID-19, Goldman Sachs forecasts zero earnings growth for U.S. companies, while airlines and cruise lines are reeling as people opt to stay home, which let global economy standstill.

As per experts of  economics, it could cost global economy by US $ 2.7 Trillion & could push around half a billion people into poverty – As per Oxfam

 

Read impact over the global economy here-Will COVID-19 Impact Deep Down in the Roots of World Economy

The general thought may come in one’s mind that why can't government print more money to tackle the economic damage caused by COVID-19. What stops the government from printing more money and distribute it to the people of the poor & distressed category ?

Can the Government print more currency whenever they want to?

The answer is yes, In fact, in recessionary times only – countries do resort to printing money, or what is known as Quantitative Easing (QE), – a term that became popular just after the recession in 2008. Quantitative Easing is the monetary policy whereby the central bank buys predetermined amounts of government bonds or other financial assets in order to increase liquidity into the economy by giving funds to the Government and correspondingly Government releases the fund for the revival of Economy. But, that measure is only for extreme situations and is also considered dangerous because printing more money causes inflation in the economy, and if you print too much money you can get hyperinflation too.

How printing more money & helping the poor in such distressing circumstances could be dangerous for an economy?

Currency (Money) is something which can be used as a medium of exchange for payments of goods and services. It has an advantage over the barter system(where you exchange one good with another good instead of money). Every country is having their own currency, hence for making fair exchange system for cross-boarder transaction value assigned to each country’s currency note.

 

Impact of producing more money

In the domestic market scenario, the market value of money is determined by supply and demand theory. For example, If the government will print more money & distribute it to the needy ones, then people will end up having more money to spend. Now, more people will go to the market to buy things which will make things more expensive (i.e. hyperinflation). Note, this is only happening because the country’s GDP (Actual net production) hasn’t actually risen and also the supply hasn’t risen but since the purchasing power has increased which has created more demand. Excess of demands oversupply will create inflation.

 

*

a. AD- Aggregate Demand

b. AS- Aggregate Supply

c. Y- Income1

d. GPL- Gross Poverty Line-

e- Inelastic- Constant/stagnant 

Above diagram shows how the increased aggregate demand(AD) due to increased spending power has led increased inflation & poverty. 

In the year 2008-09, Zimbabwe does the same thing, they printed excess currency and released it into the economy. The inflation was gradually increasing since then, year on year basis, which has now led the price of a 2-litre bottle of cooking oil to $ 13 million ZMD “Zimbabwe” banknote in the year 2019. Which is a result of the total devaluation of the currency. It shows the capability of inflation at its beast.

 

Similarly In the International market scenario, for determining the value of a currency in one country the concept of PPP (Purchasing power parity) is used.  According to this theory, the medium of exchange between countries is determined by the purchasing power of each country, suppose the price of Apple is ₹ 72/kg in India and in the USA, it is 1$ so, this means the same amount of good in India can be purchased in ₹ 72 which can be purchased at 1 $ in the USA, thus the value of 1$ will be ₹ 72.

Printing more money devalues the currency in the international market,  As the spending capacity of domestic buyer increases which creates high  inflation  in the domestic market, therefore, the resulting price of the same apple grows  to ₹ 90 however in USA same apple is sold at  US $ 1. Hence the Currency value of 1$ is ₹ 90 Now as compared to earlier ₹ 72. This is called the devaluation of money.

Say the government trying to fulfil the Supply deficit by importing goods from other countries then importer has to pay more for the same product(Because the value of ₹ has decreased ). Which also create hyperinflation situation in the country.

During the world war, II Germany did the same thing, as they were having huge debt due to war, So their government thought of printing more money, but it created an economic crisis due to the devaluation of money & eventually, they had to burn all those notes.

 

So the real option left with the government is to increase the gross product of the country which will boost the real GDP which will enable the government to produce the money without affecting inflation rate to curb out the impact of COVID-19.

stay tuned for more updates.