Wait! Didn’t you say that Governments can’t just print money? What’s going on now?
In a previous post we talked about why governments cannot just print money. You can read the post here but essentially we explain very rationally that a government could choose to print money, spend it for whatever they wanted and it would work briefly. But, given the oversupply of money, inflation would occur and the currency would be devalued vis a vis other world currencies. Zimbabwe in 2015 is our favorite example of this actually happening and we love to show the Zimbabwe 100 billion dollar bill as the result of this extreme example.
So, we presented a very good argument of why governments have to keep their spending under control and can’t just print/spend as much money as they want. So what is happening now? Canadian stimulus spending and tax cut measures have already topped $300 Billion (according to the IMF) and the United States is considering more on top of the almost $3 Trillion (that’s Trillion with a “T”) that has already been approved.
The answer is that simply the entire developed world is doing the same thing, in varying degrees. Since everyone is “printing money” currencies are not being affected significantly and there is little inflation due to increasing prices of imported goods. Similarly, since the domestic economy has been so badly affected by Covid-19 lockdowns that the extra money in the economies is not causing inflation for goods produced domestically.
Eventually, all countries will need to get their spending back in control (as national debts will increase), but for now, we are unlikely to see any billion dollar bills in the near future.