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  • 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.

  • Now, this may seem like a rather silly question, but I think it may be one of those questions

  • people might be a bit too embarrassed to ask, but there's shortage of people wondering.

  • 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 currency".

  • But I'll get to that... first though, we need to establish exactly what money... is. Now

  • this may seem obvious, but something that's important to know, is that money, has absolutely

  • no... intrinsic value. What that means is that money in itself has no actual value,

  • it's only considered valuable because it can buy things, but if you were stranded on a

  • desert island, money would be totally useless. Money only has value because we believe it

  • has value. This is called the Tinkerbell Effect, something I learned about from Vsauce.

  • The Tinkerbell Effect is used to describe something that only exists because we believe

  • it exists. And this is the case with money. Hypothetically

  • speaking, if people suddenly started to believe that money had no value... it wouldn't have

  • any value. Of course it wasn't always this way, money

  • has been around for millennia, and when it was first used it was in the form of commodity

  • money. Things were traded that had actual value and uses, like salt, spices, horses

  • or weapons. As well as this precious metals such as gold as silver, which technically

  • don't have any intrinsic value either, but due to their rarely are almost universally

  • as currency. Then we have representative money. Since carrying

  • around everything you own can be difficult, representative money makes more sense. Basically

  • you give your gold to a bank and they keep it safe for you, and in return they give you

  • a piece of paper acknowledging that you own that gold. These pieces of paper can therefore

  • used as money as anyone can go and redeem the gold at any time.

  • But today, almost every country in the world uses fiat money. Fiat money requires faith

  • and trust in the government that their money will have value.

  • If we use a relatively young country as an example, the United States has gone through

  • all three monetary systems within 200 years. In 1792, when the US stopped using European

  • money. The Coinage Act of 1792 brought the inception of the US dollar. The US dollar

  • was originally in the form of commodity money in the form of gold, silver and copper coins.

  • The coins were actually made from real gold, silver and copper, and the value of the metal

  • that made the coins, were exactly equal to their face value.

  • The country then moved onto a mixture of commodity and representative money with the 1900 Gold

  • Standard Act. The government issued dollar bills which could be exchanged for gold at

  • any time. Gold Standard is a type of representative

  • money that money countries used at the time. This was an effective way to accurately calculate

  • the exchange rate between countries. For example, if one gram of gold costs £1

  • in Britain and $1.50 in America, then you can easily deduce that £1 equals $1.50.

  • Gold coins were discontinued and the silver was removed from the other coins, effectively

  • ending commodity money. In 1971, Richard Nixon officially abandoned

  • the Gold Standard, and the US moved onto fiat money.

  • So money today isn't back by gold or anything else of value for that matter.

  • So back to the question at hand; basic economics tells us that an increase in supply, results

  • in a fall in demand and therefore a fall in price. So the more money in the economy, the

  • lower the value of each dollar. Meaning other countries can purchase more dollars in exchange

  • for their currency. A second supply and demand graph shows why

  • this leads to a rise in prices. More money in the economy causes a shift in the demand

  • curve for goods and services, but since this isn't matched by in increase in economic output,

  • prices must rise. Look at it this way, if the government printed

  • a million dollars and posted it to everyone in the country, causing everyone to go out

  • to buy a sports cars... but there's only a finite number of sports in the country.

  • If we use an analogy to demonstrate this... imagine there's 4 people on a desert island,

  • they each have 10 pieces of fruit each. All fruits are considered equal in value.

  • Now imagine they discover a whole forest of apple trees. The nominal value of apples has

  • increased because there's more of them, but the actual value of an apple has gone down

  • due to an increase in supply. Therefore it now costs 10 apples for 1 banana

  • since demand for apples is low, but high for bananas.

  • Just to clarify, in this analogy, the people represent different countries, the fruits

  • their respective currency, and the apples tree is the printed money.

  • But it's not only because of economic theory that we know printing too much money is bad

  • idea, there's several examples throughout recent history.

  • The most recently example is Zimbabwe. Who, in 2008, suffered extremely high inflation

  • due to printing money. This was the result of some awful decisions

  • by the president Robert Mugabe. When the economy took a turn for the worse,

  • Mugabe printed more money to pay government expenditure.

  • This caused inflation to skyrocket, and, in mid-November 2008, Zimbabwe's inflation peaked

  • at... actually wait hold on a second, first I need to provide some context.

  • Inflation in the United States is around 2%, economists generally agree that inflation

  • level around 1-3% are optimum. First-world countries' inflation rates today range from

  • 0-5%. A country is said to have enter hyperinflation when their inflation levels exceed 50%.

  • So... with that in mind, Zimbabwe's inflation, at its peak, reached... 6.5... sextillion

  • %. Or to put it another way... that number has 22 digits.

  • It got so bad that prices doubled every 24 hours. The government tried to solve the problem

  • by printed more and more money with higher and higher denominations.

  • They also kept knocking zeroes off the end by re-valuing the Zimbabwean dollar 3 times,

  • going through 4 different types of currency with 4 different ISO codes.

  • Before the final re-denomination, they were printing 100 trillion dollar bills.

  • People were literally using wheelbarrows full of cash to buy a loaf of bread.

  • The government even made inflation illegal at one point and people were actually arrested

  • for raising prices. In 2009, the Zimbabwean dollar was abandoned

  • and to this day they still have no national currency, their people use currencies such

  • as the US dollar, the Pound Sterling, and the Euro. Before the hyperinflation, the first

  • Zimbabwean dollar was worth about 1.25 US dollars. If that 100 trillion dollar bill

  • was worth that exchange rate, that single bill would be worth more money than there

  • is in the entire world... twice. But as ridiculous as this was, this is only

  • considered to be the second worst inflation in history, after Hungary in 1946.

  • Although Zimbabwe's inflation peaked in Mid-November of 2008, their overall highest monthly inflation

  • was 79.6 billion %, whereas Hungary's highest monthly inflation which took place in July

  • 1946 was 41.9 quadrillion %. With prices doubling every 15 hours.

  • To put that into perspective, a country with a healthy inflation level of around 3%, prices

  • double every 23 years. Their currency was called the pengo, and as

  • inflation rose, the bil-pengo: short for billion pengo. Which is actually one trillion pengo

  • on the short-scale. As well as the record for the highest monthly

  • inflation, Hungary also holds the record for the highest denomination banknote ever issued

  • - the 100 million bil-pengo note. (ie - 100 million billion, or 100 quintillion). Which

  • is 100 quintillion pengo on the short-scale. 1 milliard bil-pengo were printed but never

  • issued. In 1941, the exchange rate was about 5 pengo

  • to 1 US dollar. In 1946, when the currency was discontinued, things had gotten so out

  • of hand, that if you took every single banknote in the entire county, they would have a total

  • value... of one tenth... of a US penny. Hungary then switched the the forint, where

  • 1 forint equalled 400 octillion pengos. That number has 29 zeroes.

  • So that's why government can't just print money to pay off their debts, it does not

  • end well. It's also important to understand exactly

  • what national debt is. National debt is much more complicated than personal debt. It isn't

  • simply a case of 'you owe people money'. Take the country with the highest National Debt

  • - the United States, that currently has around 17 trillion dollars of debt, and you're probably

  • aware the country holds most US debt is... China. Although that is true, it's somewhat

  • misleading. Of the total debt, China only has about 8%. Most of the debt is actually

  • owned by the United States government itself, but organisations such as Social Security

  • or the Federal Reserve. On top of this, a further 30% is owned by

  • US citizens.And even though 8% of 17 trillion is still a lot, China can't just knock on

  • the door of the White House and demand 1.2 trillion dollars. It doesn't work like that.

  • Basically, the US Department of the Treasury issue treasury bonds. You can buy these bonds

  • and the government will pay you interest on that bond every year, then, once the bonds

  • have matured, they'll buy the treasury bonds back from you.

  • 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" Thanks for watching!

Have you ever wondered why countries can't just print more money to off their debts...

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