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Thoughts on If Printing Dollars Will Cause Hyperinflation

Updated on May 12, 2020
Anne Matthews profile image

Anne has a bachelor degree in Behavioral Science and has worked in Human Services as an Outreach Worker.

Will Printing Money Cause Hyperinflation as in Germany in 1923?

So I have heard concerns that if the Treasury Department of the United States Government prints more and more money that is not backed by gold, the result will be hyperinflation just like Germany in the 1920s, when a person needed a wheelbarrow full of money to buy a loaf of bread. Well, one reason that this is not likely is that the American Dollar is the world's Reserve Currency. So, what does that mean in actuality? It means that a lot of the trading between countries is performed in dollars, and in particular, OPEC countries will only sell oil in American dollars. Add to that, that America has trade deficits with many countries but especially China, which sells more manufactured goods to American retail stores than it buys goods from America. The result is that many countries hold dollars and have siphoned off currency from America. Imagine America as a plastic bag of water with holes in it and water leaking out into many bowls. There is as much water outside the bag as inside it. So if we have a trade deficit with any country, we do not owe them any money, but they have millions and billions of American dollars

What happened in Germany in the 1920s was that the German currency was gold backed, and tied to the amount of gold in the German Central Bank. As the government printed more and more paper money, it became less and less valuable in relation to the gold. It is a bit like a pie. if you have four people eating a pie you can cut it into four big pieces, but if you have eight people, you have to cut it into eight small pieces, and so with more and more Marks in circulation and tied to gold, they represented less gold, and less value. The American Federal Reserve dollar which is the world Reserve Currency is backed by oil, and not by gold. It is called the Petro Dollar by some, but not officially. But look what has happened to the price of oil as of now, May 2020. The price of oil has dropped into minus figures by the barrel, as people stay at home and do not drive, all over the world! Those countries such as Saudi Arabia that are wealthy because of their oil exports are losing revenues.


But to come back to the value of the American Dollar: the question is, does currency need to be tied to anything at all? The purpose of a currency is to allow for the exchange of goods and services. To be a currency, a medium of trade exchange, it needs to meet certain requirements: that the populace cannot make their own currency but only the authorized version is used; that it will not decompose or rust over time; and that it can be made into measurable units. So in the past gold was the best medium for currency, especially if it was minted into coins. Now, with computers and the internet there is no need for precious metals. All that is required is a permanent record of transactions in units, issued by the Government for transactions between third parties and honored by all countries and their banks. So it is a matter of what is the most trusted currency, which makes it valuable. Which do you trust more, for example: the American Dollar or the French Franc?


Now I have heard people say, "We can go back to the barter system" as if this were a good thing. Bartering was a fairly random way of exchanging goods and services, and having currency is more efficient and fair. If I have chickens, eggs, cows and milk, and you have potatoes, carrots, and you make furniture, we have to decide between us how many eggs equals a chair, or how much milk equals ten pounds of carrots. With currency we can put a value on objects and services according to supply and demand. But in the modern world, without currency, which is the "medium of exchange for goods and services" by definition, goods and services are not exchanged. As the American economy loses liquidity, and consumers have less disposable income, less goods are purchased and fewer services are used, and the annual wealth of the country is measured by the amount of goods and services produced each year. As the population expands the currency base needs to expand with it or otherwise people are getting poorer. The more people that there are in the world the more dollars are needed because people in other countries may decide to invest their money in dollars. So ultimately is fiat paper currency worthless because it is not backed by gold? My personal opinion, which seems to run counter to the opinion of many, is that the currency needs to expand with the population and to account for money leaving the American Economy, or otherwise as trade deficits occur Americans get poorer.

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    • Anne Matthews profile imageAUTHOR

      Anne Matthews 

      2 weeks ago

      Here is one link to an article about the Federal Reserve and the Treasury being merged. It only happened a few weeks ago.

      https://dailyinformer.com/2020/03/28/is-the-federa...

    • CHRIS57 profile image

      CHRIS57 

      2 weeks ago from Northern Germany

      Thanks for the information about the Fed and its joining with the Tresury dept. Would be so kind and provide some links, please. Same as you, i am also not a macro-economy professional. I only try to make common sense out of this.

      To this "common sense" i can add a little from my personal background as international industrial consultant. First of all:

      Structure of an economy:

      Consists of manufacturing sector and service sector. Manufacturing is crucial, because making stuff takes care of replacing and renewing the economy. In my understanding this should be in the range of 15% of the economy. If it is less, then products have to be imported. Actually this is happening to the US with less than 10% production. So the US needs to import 5% to meet ends. This is happening by buying cars and medical equipment from Germany, consumer stuff from China and Japan and so on. Trump doesn´t like it. There is a little counterbalance because the US is exporting natural resources (oil, gas). So probably the trade deficit is now in the range of 3%.

      If this is understood, what would happen if the US does not import any goods from the outside? Well, the balancing law for 15% production must be met, so if the US decides to cut all imports, its economy will have to shrink, so the absolute value of 10% today is the relative value of 15% if imports are cut. In other words, things would fall apart. People don´t buy a new car every 6 years (that is 15%) but every 10 years (10%). You know what happens if a car gets older.

      So the US borrows money from international lenders, countries like China, Germany, Japan, Saudi Arabia. The sum may be now 70% of GDP. Looks huge, but then remember my first comment, it is only 7% of total assets. The US is not to be afraid of foreigners, but China would loose more if they withdraw their money.

      Service: Not that important for long term development. You can only grow and feed from one potatoe (produce), no matter how often you wash and clean and peal and cut and cook and pack the potatoe (service). By the way, products are storable and tradeable, service not really. Service is always void at the point of sale.

      Money: Mostly credit. If you get your paycheck on a monthly basis at the end of the monthly working period, you actually lend half your paycheck to your employer. I suppose paychecks in the US are some 40% of GDP. 60% of the workers may be payed this way. Then 40% x 60% = 24% of GDP is regular credit that employees hand out to their employers. Same the other way around if you pay rent to your landlord at the beginning of a months. You see credit and having to borrow money is something very natural in a developed economy. You don´t even have to print money out of thin air.

      A day laboror gets payed by the day, so he only lends 1 day pay to his master.

    • Anne Matthews profile imageAUTHOR

      Anne Matthews 

      2 weeks ago

      I am new to this and I think that your thoughtful response certainly deepens the conversation, and gives the reader plenty to think about. I am posting a link to my other related article which covers some of the points that you mention.

      https://hubpages.com/education/Reflection-on-Where...

      I think that there are two issues I would like to bring to your attention.

      1) Very recently with one of the CARES ACT that was passed in April, the President did something to the Federal Reserve, which you know is a private corporation, and he merged it with the United States Government Treasury, in some fashion that I do not fully understand. I quote from the Tennessee tribune :

      "According to Bloomberg’s Jim Bianco, the Federal Reserve and the Department of the Treasury came up with a scheme that essentially merges them into one organization. “In effect, the Fed is giving the Treasury access to its printing press,” wrote Bianco.

      The Treasury Department has created a series of special-purpose vehicles (SPV). Think of it like a bunch of SUVs stuffed with cash driving around the economy and buying up all sorts of financial assets, toxic and otherwise.

      “This means that, in the extreme, the administration would be free to use its control, not the Fed’s control, of these SPVs to instruct the Fed to print more money so it could buy securities and hand out loans in an effort to ramp financial markets higher going into the election,” wrote Bianco."

      You might want to do your own research on that.

      Secondly, I have also heard that the "Petro Dollar" is enforced by the American Military, and I do not understand how that works exactly, as 13 OPEC countries trade their oil in American Dollars, as opposed to say Rubles, Yuan, Marks, Drachma, Pesos, and presumably they think that it holds its value, but how does that benefit the USA? It gives countries that have a lot of oil the opportunity to buy American politicians, and I have heard that former president Obama was put through school with the money from a Saudi Prince. Anyway, thank you for your thoughts.

    • CHRIS57 profile image

      CHRIS57 

      2 weeks ago from Northern Germany

      Interesting thinking, even though please allow me to not agree to some of your statements.

      The currency situation in the US is definitely not comparable to Germany in the 1920ties. IMHO there are 3 major properties, that make up a currency.

      1. only one source of emission (self explanatory, otherwise everyone could print fake money)

      2. guarantee: the value emitted to be used for trade must be guaranteed for by some authority (state, government, emperor). That is why you find so many famous heads on ancient coins. It is mostly the guy, who took responsibility for the value

      3. guarantee must be backed by values (probably that is what you reflect on with gold standard).

      Actually we have to discuss no. 2 and no.3. Lets start with no.3.: In an economy, the currency is backed by the assets in that economy. Now, those assets are all net values from private households, corporations, financial institutions and last but not least the public sector itself. These assets, this capital make up the guarantee for the currency.

      For most countries and certainly for the US, the assets are some 8 to 10 times the annual GDP. Even if in Corona times a stimulus of some 4 trillion is printed out of thin air, it is only 20% of the GDP and probably no more than 2% of the assets backing the value of the Dollar. That is why President Trump is basically right if he says: "We can print Dollars as many as we want to"

      So much about the balance sheet of a country, of an economy. What applies en large for countries, applies en miniature for a corporation. And a company gets into trouble, if its debt is above 1/3 of its assets. Reason is that in case of bankruptcy assets melt down to some 30% of book value. This is the reason why countries like Greece are in dire situations (public debt 300% of GDP and assets only 800% of GDP). Again, the US has nothing to fear, (public debt some 100% of GDP, assets 10 times as high).

      In old Germany situation was more like Greece with little assets left after WW1 and heavy reparations (give away assets for free) imposed. Totally different situation.

      No.2. makes me more worried. Who is issuing money in the US? The Federal Reserve. And who is controlling the Fed? Go into the history of the Fed and you find it was founded by a "club" of financial institutions (banks) and industry. Until today the Fed instruments (interest rates, bond issue) is not under control of the government. That is why current administration and the Fed are always in a fight.

      A last one on petro dollars. Yes - to be the reserve currency of the world, you have to make sure that resources are traded in USD. This is not a naturally given law or privilege. The US is enforcing this very brutally by military force. Every country on this planet, that is not strong enough to bully back, is a victim. Just take Iran. The US couldn´t care less about Iran, if it were not that Iran trades oil in currencies not necessarily the USD.

      Inflation, hyperinflation is linked to basic accounting methods (the balance sheet), Petro dollar is about world politics and domination. Just saying...

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