In the wake of the pandemic, several countries are battling difficult economic conditions and facing a potential crisis. Given the macroeconomic challenges faced by different countries, there is a pressing need for corrective action to move these economies to a higher growth trajectory. One would be tempted to ask why governments cannot resolve these economic issues by printing more currency notes. Sure, it seems like an easy remedy to this problem. However, there could be severe implications that a Government should consider while contemplating such a move.
One such issue is that it would invariably trigger an inflationary cycle, further aggravating the problems of slow or negative growth. This condition is known as stagflation which is the combined effect of the twin problems of stagnation and inflation. It would be appropriate here to cite the example of Zimbabwe and Venezuela, where indiscriminate printing of money led to hyperinflation, thereby seriously eroding the value of the domestic currency. When Zimbabwe 🇿🇼 was struck by hyperinflation in 2008, prices rose by as much as 231,000,000% in a year. With runaway inflation, the price of a bar of 🍫 (for example) surged from 1 dollar to 231 million Zimbabwean dollars in one year. Therefore, it is hardly surprising that Zimbabwe is still grappling with hyperinflation due to the excessive printing of money in the past.
<aside> 👉🏽 Stagflation is persistent high inflation combined with high unemployment and stagnant demand in a country's economy.
A country must make and sell more things – whether goods or services, to get stronger economically. This growth in economic output provides a cushion to print more money so that people can buy those extra things. If a country prints more money without producing more items, then prices just go up because more money is chasing the same quantity of goods. For example, think of those unique vintage Star Wars toys from the 1970s, which is a prized possession for some. They don't make these toys anymore. So even if people have more disposable income, it won’t mean that they can afford to buy them because the makers can afford to raise prices in response to a high demand.
Now, one country can get away by printing more money, and that’s the United States 🇺🇸. This exception is because most of the valuable stuff that governments worldwide buy and sell to one another, including gold and oil, are priced in US dollars 💵. However, poorer countries can only print their currency, not US dollars, and if they churn out a lot more, their domestic prices will spiral fast, and people will stop valuing that money. Hence, indiscriminate printing of money is certainly not a panacea for solving any economic problem. However, it can be a discretionary recourse in a limited way as a short-term measure.