Why don't we simply Print Money to pay off US Debt?

Have you ever wondered why countries can't just print more money to off their debts. or to feed the homeless or fix unemployment, or any other issue for that matter. The short answer can be summed up in just one word... inflation. Inflation is defined as "a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of the currency. Technically we could potentially resolve our debt problem in that way, but it would lead to much bigger problems. Primarily, it would result in hyperinflation .With trillion new US dollars in international hands and over a trillion of that in China alone--a dramatic increase in national income everywhere except the US. That income spike would cause aggregate demand for goods purchasable in US Dollar to soar. Merchants would naturally respond by increasing the price of their goods, re-stabilizing the real value of the dollar. The consequences of such a series of events would be catastrophic. The purchasing power of the dollar would decrease enormously. This would place strain on American buyers who now have to pay more for goods without the higher income that China has received and thus cause a recession that would dwarf that of 2008. Unemployment would spike, as many firms would find it advantageous to migrate to China and elsewhere where there is new demand for their products. Meanwhile, the People's Bank of China, for one, would be pissed because, even though they now have more dollars than they did before, those dollars aren't worth nearly as much as when they sold that debt to the US. Whereas before $1.3 trillion could have bought China, say, 200 aircraft carriers , after inflation of this magnitude , it might only buy them 20. And we know that China's in this for the aircraft carriers. They would begrudgingly buy those 20 carriers and haul them across the Pacific to vent their frustrations against our now-decrepit Treasury in person. Meanwhile, we'd be firing bows and arrows from canoes like those island people that went to war with the US in that British movie. Doomsday scenarios aside, we would end up with two major problems (among others, for sure): a devastating recession and a diplomatic fallout with China (and other servicers of US debt). Basically, the dollar is only valuable if it's scarce, because we use it to procure scarce resources. When it's no longer scarce, its no longer transitive as a currency and has no value. So, in reality, the reason that other countries would no longer lend us money if we freely printed our own is because the exchange rate between the dollar and any other currency would approach zero, leaving banks and merchants with nothing to gain by transacting in US dollars. There would be no incentive for nations to produce anything of real value, rendering the concept of GDP meaningless. Furthermore, if we could resolve debt by just printing bills, there would be nothing to prevent other countries/central banks from doing so--and you would end up in a world full of meaningless currency. Money is nothing but a record or a sticker of total goods and services produced in an economy. Therefore money can be printed only at the same rate as an economy (GDP) is growing. So if US GDP grows at 3%, US can print 3% extra dollars. However if money supply exceeds GDP growth, there is double entry of goods and services produced so a particular good/service is counted twice but can only be delivered once. Its quite obvious that the 2 potential suitors for the good produced once but counted twice will be engaged in a furious bidding war which will drive the price of the good produced once but counted twice. Ultimately you will have a balanced equation where on one side there will be extra currency printed (above the normal rate of GDP growth) and on other side you will have extra price you have to pay for that good. So if you don't print money if your GDP is growing, you face a depression ,but if you print money in excess of your GDP growth, you face higher inflation which leads to demand shortfall causing job losses. This condition is called stagflation which is worse than depression. In depression jobs are hard to come by but prices remain low. In stagflation, you have few jobs but prices remain high as all the excess printed currency is still in circulation. The US has some leeway as US dollar is global reserve currency . So The US can print dollars slightly in excess of its annual GDP growth but this will reduce US debt by few 10s of billions every year when theoretically the US needs 100s of billions every year to reduce its debt. The best way forward is to refinance the debt and push for higher growth every year and pay back over a period of several decades but such a scenario is susceptible to black swan events like wars, recessions etc. Now, if a country gets into financial trouble, it may have to default on its debt, which basically means you won't get your money back. But the US is generally considered an extremely risk-free investment because the US dollar is the most widely used and most trust-worthy currency in the world. It's even written into the Constitution that the United States cannot default on its debt. I'll leave you with this final thought and what I think is possibly the best way to sum up why governments can't just print off unlimited amounts of money : "If money grew on trees, it would be as valuable as leaves" .







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