Money in Poor Countries: Govt. Printing Money & Increasing Salaries

[chound]

Can the govt. of poor countries print enormous money and using that money increase the salary of the people and buy resources. Since the govt only prints the money, can it print how much ever it wants or can it print only some limited amount?

 

[russ_watters]

Yes, but there's a catch: when you print more money, the value of your money decreases proportionally. So a country doesn't really gain wealth by printing money - it just increases inflation.

 

[Astronuc]

As Russ indicated, money (more precisely paper currency) is also subject to the rule (or law) of supply and demand. It's value must be represented or supported by something of value, such as a material commodity like gold, silver, or diamonds, or some other natural resource, such as trees (lumber), minerals, petroleum, etc.

On the other hand, take a small country or state, like the Principality of Monaco, or Lichtenstein. They have develop their value in providing services like banking, entertainment, gambling, etc, i.e. something that other people (outsiders) demand. Their money/currency is supported by foreign exchange.

If the money was made of gold or silver, it would have some intrinsic value.

 

[chound]

can the govt print money illegally and say that the money came from more people paying tax

 

[russ_watters]

can the govt print money illegally and say that the money came from more people paying tax

You mean to hide the fact that its new money? No, because money is distributed by banks and banks get (buy) the money from the Federal Reserve. That's where the supply and demand thing comes in. The money that the government gets in taxes is all electronic (checks that go into bank accounts) and they can no more add a zero to the end of their bank statement than you can.

 

[Averagesupernova]

Chound, think of it this way: The government suddenly decides to print more money and it is distributed. Now, everyone has more money. I have a car to sell and since I know everyone has more money and someone somewhere REALLY needs a car, my price goes up. That is a very simplistic scenario.

What decides the wealth of a country is NOT the money printed. The basic natural resources decide it along with any service the people of that country can offer. Things of this nature. The amount of currency is a representation of that. The only real reason for currency is simplified trading.

 

[Tom McCurdy]

I have often wondered when a new country is created how is the money first distributed...

What I mean is say I start a new country, I am printing money, how do I distribute it to a society, and since I control the inital dollar, I would be able to decide how much the "dollar" would be worth because I could control the supply

 

[russ_watters]

What I mean is say I start a new country, I am printing money, how do I distribute it to a society, and since I control the inital dollar, I would be able to decide how much the "dollar" would be worth because I could control the supply

That's true, but the same catch still applies: your money is worth whatever the currency market says it is worth based on the trust the market has in your country's ability to keep its financial promises. Until this century, that trust was backed by gold: the government would exchange your dollar for a set amount of gold. Today, that's unnecessary for large countries, but small ones still need something of value to back their currency. Most use the US dollar. But this still only works up to a point. If people stop trusting you, they may want to trade in all their McCurdyDollars for American dollars. If you can't pay, your economy collapses.

 

[Tom McCurdy]

So basically to create an amazing economy you just have to convince people that your money is worth whatever you want... Seems that the treasury of countries should be run with aid of phsycologist on how to best make people think the money is worth the maximum value that people would accept.

 

[russ_watters]

So basically to create an amazing economy you just have to convince people that your money is worth whatever you want... Seems that the treasury of countries should be run with aid of phsycologist on how to best make people think the money is worth the maximum value that people would accept.

Yes, economics is largely based on the psychology of the mob. Vaguely unsatisfying/disturbing, isn't it?

However, you now know the key to American economic success: optomism. The American economy is strong because optomism is part of American culture.

 

[Tom McCurdy]

Whose ecomony currently is the strongest in the world?

 

[Moses]

I have a question that just pop up in my mind now.

Suppose there is a country have a lot of oil "a Gulf country let's say", is it wise if they cover their currency for oil. From the firsdt glance i guess it is not since if it is wise they will have done it before i am, but i am born and they haven't done it yer...

I am happy if one can give me an explanation.

 

[russ_watters]

My response to this got cut during cleaning:

Whose ecomony currently is the strongest in the world?

It depends on how you measure it (absolute or per capita, large vs fast growing), but the US is largest in absolute terms and Luxemburg is largest per capita. (DATA)

Growth rate is a good indicator of momentum and thus strength (though size is more often used), but can be clouded by small countries having massive short term increases. HERE is some data on that. The most notable country on the list is China, which has maintained ~8% for some time and is expected to maintain it for some time to come. (note: that data is for one year only, and there can be large year-to-year fluctuations for any country).

Aquamarine - when you see someone puke in the supermarket, report it to someone who works there and a janitor will clean it up. Don't try to do anything about it yourself.

 

[russ_watters]

I have a question that just pop up in my mind now.

Suppose there is a country have a lot of oil "a Gulf country let's say", is it wise if they cover their currency for oil. From the firsdt glance i guess it is not since if it is wise they will have done it before i am, but i am born and they haven't done it yer...

I am happy if one can give me an explanation.

One of the prime reasons not to tie your currency to a commodity is that commodities can be very unstable. Oil's gyrations in the past week are a great example and the price of gold is another: as it turns out, when we were on the gold standard, it wasn't gold keeping the value of the dollar constant, it was the dollar keeping the price of gold constant.

 

[gravenewworld]

It all depends on whether or not you believe in Keynesian economic theory. If you believe in classical economics, then Monetary policy has NO effect--it only increases prices. The FED only exists because politicians heavily believe in Keynesian theory. Now if you believe in Keynesian economic theory--that is that prices adjust slowly--then monetary policy will have an effect. If you want a pure Macroeconomic theory explanation first assume money supply is increased by a government, so a the money supply curve moves out while money demand stays same. This results in lower interest rates. When the interest rates decline this causes a shift in the LM curve in the ISLM model (the most important model in all of macroeconomics). A shift outward of the LM curve causes an expansion of GDP and lower interest rates. However, this is the part where Keynsian economics comes in. Since prices are sticky, you will have a temporary expansion of GDP. When GDP (i.e. income increases) people demand more money. As more money is demanded the money demand curve in the money demand money supply model shift outward. This raises interest rates leading to a contraction of the LM curve. The LM curve just simply moves back to where it started. Since aggregate demand is derived from the ISLM model a contraction in the LM curve raises prices, i.e. more inflation. The REAL money supply remains unchaned since prices increased. Keynesians and Classical economists both agree on the same thing--Monetary policy has NO effect in the long run in the macroeconomy. Prices will just adjust to set off any monetary action a government can take. The difference is in the short run. Increasing the supply of money according to Keynesian theory will give a temporary burst in GDP, while classical economics preaches that an increase in the supply of money will cause prices to increase INSTANTANEOUSLY, thereby offsetting positive effects of the increase in the supply of money.

 

[Tom McCurdy]

How is the US doing compared to the rest of the world with its economy.

 

[russ_watters]

The US has the largest economy in the world.

 

[selfAdjoint]

The US has the largest economy in the world.

And the biggest external debt.

 

[Moses]

But i guess Germany and Japan has a strogner economy than the U.S in term of stability and balance...etc but the U.S still has the largest.

 

[gravenewworld]

The US is the largest and most stable economy in the world. Although the US may have large debt, as a % of GDP it is much lower than some other countries in the world. That isn't to say though that US debt is not a problem.

 

[selfAdjoint]

The US is the largest and most stable economy in the world. Although the US may have large debt, as a % of GDP it is much lower than some other countries in the world. That isn't to say though that US debt is not a problem.

This is correct, but it would be intersesting to look at the kind of countries that have a larger ratio of foreign debt to GDP than the US - I don't think any of them are first world economies! Debt to GDP in the US is over 5% and growing. That's what it was in Argentina just before the collapse.

 

[gravenewworld]

Debt , not the budget deficit, to GDP is much higher than 5% it is over 60% of GDP for the United States. The CIA has a world factbook on every country. http://www.cia.gov/cia/publications/factbook/rankorder/2186rank.html