Governments Printing Money Is Always a Dangerous Business

It occurred to me today that one of the fundamental elements in the Eurozone sovereign debt crisis is not talked about at all, not by me or the professionals.

The element is that none of the Eurozone countries can print their own money. Just as no American state can print its own currency, the Eurozone countries are bound by the same rule.

Why is this important? Because it makes it impossible for a Eurozone country to solve its debt problem by printing more money.

That’s what America has been doing since long before WWII. When the tax revenues fall short of meeting the budget needs for the next fiscal year, the United States, in the form of the Federal Reserve, simply makes more Dollars available in the market by printing them. This works quite well as long as the world has faith in the ability of the country printing the extra currency to re-pay one day. That is why investors are willing to buy US Treasury bonds - they know that one day (the due date for the repayment of the principal) America will pay what it owes.

But, what if America could not print the extra currency (Dollars) it needs? There would be no money for the government to meet the demands of the budget - Social Security, Medicaid, Medicare, Bond interest payments, federal salaries, grants to education and research, military costs, national park costs, etc…) would not be paid. So, if America were not allowed to print the money it needs for current budget expenses, the federal government would quickly come to a grinding halt, after all tax revenues had been exhausted.

That, by the way, is the core of the argument between the left and right in American politics today. The left wants to continue to print Dollars with little restraint, while the right wants to put brakes on printing so many Dollars that eventually it will become impossible to pay back our creditors when the due date arrives. Neither side is saying ‘stop all printing.' They are arguing about how many Dollars are too many to print. That is why the right focuses on budget cuts - to put a cap on the printing of too many Dollars.

Now, with all that in mind, fast forward to Greece. Greece is a member country of the Eurozone. It is forbidden by treaty from printing the extra money (Euros) it needs to balance its budget each year, as are all Eurozone countries. They agreed when they created the Euro, that instead of printing Euros, each country would put a cap on its budget deficit at 3% of its gross national product.

The idea didn’t work, especially for the less industrial countries in the Eurozone, like Greece, Italy, Spain, Portugal and Ireland, whose economies are not robust enough to live within a 3% of GNP limit.  

That is why Greece is close to bankruptcy. That is why Italy is likely to become the next Eurozone country to be close to bankruptcy.  They need to be able to print enough money each year to make up for their budget deficits. The stronger Eurozone countries (Germany, France, The Netherlands) say, ‘too bad.’ You made a promise and you must keep it.  But, recently, even the stronger Eurozone countries have realized that it is impossible for the weaker Eurozone countries to live within their 3% straight-jacket. That is why Germany and France are leading the charge to provide additional money to Greece and why they are trying to help Greece get back to the 3% budget deficit limit. But, just today, German Chancellor Merkel said it would probably take at least 10 years. That, dear readers, can be read as ‘not in our lifetimes.’  

Just one last thing. Printing money is okay, but it deflates the value of all the money already printed and put into circulation. And, if too much money is printed, then the value of a country’s currency is so deflated that it becomes almost worthless.

We can make this point with an easy calculation. If there are 100 Dollars in circulation and each is worth 1 Dollar, the calculation is self-evident. The total value of the Dollars in circulation is 100. But, if 100 Dollars more are printed and put into circulation, then we have 200 Dollars and each is worth 1/2 Dollar because a total value of 100 divided by 200 Dollars is 50 cents (½ Dollar). Got it?

That is why printing money is always a tricky process and why stable, serious governments try to hold printing to a minimum.