Thoughts on If Printing Dollars Will Cause Hyperinflation
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.