The question asked by many is: “If the US needs more money, why don’t they just print more?” There is a good reason for that, considering that printing more money in the absence of more wealth devalues the currency not only locally, but internationally. While some of this was touched upon in Economy 101 For The Real World, the impact was not really touched upon enough that some people are still misunderstanding the terrible implications of printing more money. So, I decided to write this post to simplify things a little bit more and explain the dangers of printing money in a time where the value of the dollar is still depreciating.

Let’s say that I have 30 chickens. Since 30 chickens are lot to carry around with me in order to make a trade for, let’s say, a cow. Instead of carrying around 30 chickens, I print one US dollar which is worth exactly 30 chickens. Since I don’t have to carry the chickens, I am now able to trade using the dollar which is now working as what is called a “debt note”. In lieu of chickens, I hand them my new dollar bill on paper. While I spend the dollar to buy one cow, all my chickens are now accounted for and I cannot use those same chickens to represent a dollar again. The person I bought the cow from for one dollar (which equals 30 chickens) will come and get his chickens. He now has the dollar and the 30 chickens and can trade with whomever he desires using the dollar and the 30 chickens. I, on the other hand, am out of 30 chickens. I cannot produce another dollar because I don’t have the chickens to back it up. I do, however, need another bovine in order to make little calves which will perpetuate my herd. So I want to purchase a bull. A bull is worth 30 chickens too. I do not have 30 chickens anymore, as I spent them for the cow. If I print another dollar, worth 30 chickens I don’t have, the worth of that dollar will go down because I have nothing to back it up. The farmer I am trading with cannot cash in the dollar for 30 chickens because I don’t have them. So I promise to have 30 chickens in the future in exchange for the dollar to buy the bull. The farmer, who wanted to make good on his trade, cannot because I don’t have 30 chickens to give him right now. That means now, when the dollar was worth real 30 chickens before it is now worth 30 pretend future chickens. The value of the dollar goes down drastically as my newly printed dollar does not have 30 chickens to back it up.

The same thing works for the US dollar. The dollar is used to make trades instead of carrying around a dollar worth of gold. If the person whom we trade with comes to collect on the dollar in gold, we should have that amount in our possession. If we randomly make a dollar, which we will say is worth a gram of gold, and we don’t have that gram of gold the worth of dollar is now phantom gold that doesn’t exist. Instead of the dollar being worth a gram of gold, it is now worthless because we do not have it. Money must have worth to back it up, if it does not, the worth goes down due to a relatively empty promise that one day we will have another gram of gold. It is not a solid worth, but a pretend worth. The printing of phantom dollars means that we are willing to trade with others in dollars that have less worth than what we are trading for. International money is next.

Since I printed the dollar, which is worth 30 chickens to my neighbor, and I have traded for a cow, I want to trade with, say, Canada. Canada’s dollar is worth 20 chickens. Since my dollar is worth 30 chickens, I am saving ten chickens by trading with Canada. Let’s say I do have 20 chickens. My dollar is worth 30. If I buy from Canada, the worth of the dollar gives me more chickens when traded on the Canadian dollar. So instead of just getting 20 chickens, I get ten more at a lesser price to equal my dollar’s worth which is a fabulous deal. Now, let’s say, that I do not have the 30 chickens to back up my dollar. Since I do not have the worth of the dollar, Canada laughs in my face over the trade and tells me to get one Canada dollar it will cost 35 chickens to translate it. So now I don’t have 35 chickens much less 30. The worth of my dollar is significantly less than it should be.

Since a lot of international trade takes place in the form of a US dollar, printing phantom worth money lowers the original worth of the dollar. Other countries wishing to trade with the US can get more US products as their economic unit (dollar equivalent) is worth more than ours. The ability of the US to trade for items like oil to make into gas will be hindered because our dollar is translated into phantom “chickens” that do not back up it’s worth. What was once $20 per barrel of oil becomes $35 or more because we printed money without the worth to back it up. In other economies hurting for worth, the dollar will be much lower and their monetary units (dollars) will be worth less. In some cases where phantom money worth is not used, the worth of the monetary unit will far exceed the US dollar’s worth. This means we won’t get what we used to get for the worth of our money. Now other countries find their monetary unit worth more in US Dollars will be reluctant to pay our price when our price is ridiculously rated on phantom worth. Business will dwindle to the point where national money buys more in places like Mexico or China, where the economy is much lower and items cost less. Quality be damned, if someone can get more bang for the money with countries with poor economies, they are going to buy that item because it is affordable and meets the demand of that country’s consumers.

An American made tee shirt is worth $10 dollars in the US. A country, who’s dollar is worth 40 chickens, doesn’t want to pay 400 chickens for a shirt. They are going to go to China and get the shirt for one of their dollars and more, because the economy of China is low enough to give them more chickens worth. 40 chickens are always going to win the price war, as American goods might be more expensive and of better quality, the price hurts the market. Therefore, no one wants to pay more no matter what the quality. Companies trading internationally want the best value for their dollar. It’s how they get business. Want cheap toys? Buy from China. Who cares that they have lead based pigments in their colors? We want the cheapest toy that will make our company a better bottom line. Since American toys are not lead based, follow strict codes for safety, and might be a better quality; no suffering economy wants to pay a third more for that product when they can get it cheaper somewhere else. This hurts the dollar even more, as now the dollar’s worth is lowered even more because no country is buying American when they can get it cheaper in China or Taiwan.