Please note that printing of authentic money is not a kids’ stuff. It is also a momentous business of central banks. The title directly (in legal terms) relates to a key function of central banks, i.e. printing of money. In this key article, you will learn about central banks’ role in the creation of money by printing fresh money, creation of economic issues / potholes through this function (a real feasibility), economic stimulation, etc.
There are two approaches of money printing, namely – fiat money printing and assets backed money printing. What is assets-backed printing of money all about? Well, it means in a bid to print new money, central banks in the global economy do give assets back up in the form of gold reserves, foreign currencies, etc in an attempt to make sure there’s a minimal or no room for inflation, too. (Note: Each state or country may have a different approach towards printing of money). Printing of money is one of the important economic activities indeed.
The entire economy’s growth is subject to the printing of money, as well. Technically, all the time, printing of money by giving back up as mentioned earlier in the blog does not mean growth, growth & just growth, or no inflation or minimal inflation.
Most of folks believe that when there’s a back up to the new or fresh money, there would not be inflation-caused-by such-printing or just inflation. Well, they are wrong, if not completely. There’s a real possibility that inflation still can be caused by such printing of money, i.e. back up for fresh money.
Inflation is caused broadly by:
- Monetary system/policy
- Fiscal policy
- Other economic and non-economic factors.
One must concur to the fact that inflation would be still caused by printing of money through giving visible backing. How? That’s a big question! Here’s how, in case the new / fresh money is produced by giving back up, such money is lent for unproductive purposes (no investments or no creation of equal worth of assets to the fresh money, at least), well, in that case, there’s a real room for inflation if not for hyper-inflation sometimes.
Fiat money printing is nothing but, money which does not have assets back-up in the form of gold reserve, other key commodities, etc.
The outcomes of fiat money printing: Bad or good or terrific or horrible or unprecedented outcome(s) is/ are also banked on the employment of the new money. In other words, the purpose for which the newly printed money with no back up (i.e. fiat money) is employed, matters to a massive extent, in the whole global economy.
- In case such money is used for unproductive purposes (it has a more possibility than the latter), hyper-inflation is very much possible, when excessive supply of it occurs. Hell bad!
- In case it used for productive purposes (=creation of equal worth of assets to the fresh money, at least) (it has a minimal possibility to happen, but it can happen), great for the economy indeed. Here’s how:
When the new money, technically the money with no back-up, is lent to an economic producer, and if it is used in the creation of sufficient commodities or services at least (= best asset creation as per me – Naveen Kalyani) (and remember, the production & not consumption is the keyword!) Then that’s supposed to be called as a type of growth!
- The new money must be used in production in a scientific and economic or profitable way.
- No lending of the new money for unproductive purposes.
- A complete respect for the team work in the economy between concerned economic agents for a persistent period of time and genuinely.
- Factors of production must be used in the best or economic or profitable manner.
- Any bad stuff [embodying natural calamities] mustn’t happen till the time of the consumption of the goods / commodities made out of fiat money.
These above 5 assumptions are to be respected and if or when respected to the fullest or to a palatable extent, even the fiat money helps to contribute to the growth of the global economy or the economy gets affected sternly by inflation which is awfully bad for at least poor people in the economy.
Please Note: There’s a real possibility to happen this kind of growth due to usage of the money in above mentioned manner.
Example: The following statistics explicitly explains the above second possibility:
- A = 100
- B= 100
- C= 1
- D =100
- E= 1
A= the new money in US$ with no back up.
B= output in number of commodities.
C= price of each commodity in US$.
D= number of factor units.
E= income earned by each factor unit in US$.
Thus, the above unordered list reveals that: the new money, production outcomes, incomes of factor units, cost of per commodity & sum of factor units which are believed to be managed effectively, scientifically and economically and leading to a sort of economic growth in the world economy!
Please Note: Inflation is just concerned about the prices of essential commodities and services and not about luxurious and comfort goods, which is discussed by any central bank. In case, essential goods are produced via such money, that’s excellent! But in case of production of non-inflationary goods, that means new assets creation occur but this money would (it is banked on many economic variables) add up to inflation rates (This is very important to figure out).
Please Note: Even the mentalities of people tend to cause inflation. This is a key note, too!
The bottom line is that in case the new money with no back up, used for productive/ economic/ profitable purposes, that’s terrific! That leads to asset creation. But in case that is used for unproductive/ uneconomic/ unprofitable purposes, the new money will play the role of a destroyer and thus existing inflation, if prevailing, gets upped and leading to a lot of economic cons. Therefore, being productive (by economic agents to a persistent period) matters to a massive extent in every stage of the global economy and for safeguarding all monetary stuff! A key thing to remember is that printing of fiat money or asset backed money do not matter at all technically unless at least sufficient goods are produced in the economy to make sure there’s no or tiny room or palatable space for inflation.
Central banks in the world economy can print money to any extent (only under the absence of law(s) relating to the printing of money function, but the usage of such money in the best/ economic or productive ways matters to a great extent like it does with new money printed with a back up.