As I am writing this article, The United States has reached an astonishing $19 trillion of national debt; a $3 trillion increase from 2012 (1,2). In a world where everything else is held equal, the simple solution would be to just print $19 trillion in cash and pay the debt directly to the creditors’ pocket. Unfortunately, such a world does not exist - implementing this "solution" would cause hyperinflation and eventually wreck the U.S. economy.
Inflation is defined as a persistent and substantial rise in the general level of prices related to an increase in the volume of money - resulting in decreasing value of the currency (3). Inflation is, generally, not a bad thing if it’s anticipated as the economy can adjust itself; for example, when firm negotiates higher wages for its workers. Hyperinflation occurs when the inflation rate is so out of control that it negatively affects the economy.
Before we even dig to the core of the problem, let’s first define the type of money that we use. The U.S. dollar bill that we all know is called Fiat Money. Fiat Money is currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of Fiat Money is derived from the relationship between supply and demand rather than the value of the material that the money is made of (4). This means that our dollar bills have zero intrinsic value; we believe money has value because we can use it to purchase goods and services. However, without the goods and services available for us to purchase, money will lose all of its value. Think about it like this, the dollars that A owns in the U.S. will always be more valuable than the dollars that B owns in an island where there is only a single inhabitant (which is B himself!) because A can use it to purchase goods and services.
Now, let’s imagine that the government decides to print money and drop it on U.S. mainland using choppers. Basic economic principles tells us that when supply increases, the price (value) of the good decreases. This means, when the government prints out more money in the economy, the value of each dollar decreases. How? Let’s assume that the government gives every person in the U.S. an extra $10,000. Because now every person has extra $10,000, they would want to go to Bestbuy to purchase more electronic goods. The sellers, overwhelmed with the excess demand of these goods, would combat this by raising the price of the electronic goods. If this happened to the whole country, we would have a huge inflation here in the United States and our dollars becomes less valuable because each dollar now buy fewer goods and services.
This will crush our economy, as life savings of millions of people will lose their value. Although U.S. exports will grow, as it’s cheaper to buy U.S. goods, U.S. imports are going to be so expensive that firms will choose to migrate to other countries where the currency worth more. Unemployment would soar, leading to a huge recession that can’t be compared to the one in 2008. Regarding the national debt, China is the country that holds the most U.S. debt (5). When this happens, the People’s Bank of China will be dismayed because the dollars that they are entitled to are now worthless. Whereas before $1.3 trillion of debt could have bought them, for example, 2000 tanks, the same amount of money would only buy them 20 tanks now. Our diplomatic relationship is lost as well as our economic well-being (6).
A good real world example for this is Zimbabwe in 2008. The President of Zimbabwe, Robert Mugabe, decides to print a lot of money in order to pay external debt which increased from 11% in 1980 to 119% of Zimbabwe’s GDP in 2008 (7). This rapid increase in money supply caused tremendous hyperinflation of 231 million percent in 2008 (it’s so absurd that I don’t even want to write it in numerical form) and devaluation of its currency. At one point, a small pack of locally produced coffee beans costs just short of 1 billion Zimbabwe dollars where a decade ago that amount of money could bring 60 new cars.
To compensate for the devaluation of their currency, the government issued a one hundred trillion dollars bill. Moreover, prices doubled every few days, and Zimbabweans struggled to keep their cash resources from evaporating. Businesses still quoted prices in local currency but revised them several times a day. A minibus driver taking commuters still charged passengers in local currency but at a higher price on the evening trip home. And he changed his local notes into hard currency three times a day (7). This extreme and uncontrollable inflation turns Zimbabwe from the breadbasket of Africa into the continent’s beggar within a few years as its citizens were forced into poverty.
When I was a little child, I often imagined why do we have to work so hard in order to make money. Why can’t we just print money and not to worry about working hard to get it? Now, we know the answer. On top of that, among many ways to reduce national debt, printing money without control would do so much harm to the economy. To let it all sink in, let me give you a quote to sum it all: “If money grew on trees, it would be as valuable as leaves.”
"U.S. National Debt Clock : Real Time." U.S. National Debt Clock : Real Time. N.p., n.d. Web. 05 Apr. 2016.
Amadeo, Kimberly. "The Real Owner of the U.S. Debt Will Surprise You."About.com News & Issues. N.p., 29 Feb. 2016. Web. 09 Apr. 2016.
Wood, Josh. "Why Don't We Simply Print 16 Billion $1000 Bills and Pay off Our Debt?" - Quora. N.p., 21 Sept. 2012. Web. 09 Apr. 2016.
Koech, Janet. "Hyperinflation in Zimbabwe." 2 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report Hyperinflation in Zimbabwe (n.d.): n. pag. Federal Reserve Bank of Dallas. Web. 05 Apr. 2016.