Can a Nation Print Money to Solve Poverty?

Can a Nation Print Money to Solve Poverty?

Student asked "Teacher, I am poor. Cant the government just print more money and let us spend?"

This is a very popular question asked by my students whenever we talk about the economy. This may be a long read, but spare few minutes and read through.

Currency is not money backed by Gold since the Nixon Shock (u can google it to understand the history of when nations started giving up Gold as a standard to back their money).

So using a very simple analogy to explain the situation. Let's use "Teacher" as your government and "Students" as the people and exam marks as the money each of them deserves.

Some work hard and brilliant, so they got themselves more marks than others. Some are contented with enough for themselves so they stopped there. Some are really really backwards and behind and never seem to rise up to the standards - and we have those in poverty. Let's say they only score 5marks in each exam and we need around 40 to be up to the standard.

How do you solve the problems?

Solution 1:

The teacher can artificially give 35m to those who consistently score 5m. What is the basis? And what difference does it make in the future? (or)

Solution 2:

The teacher wants to be fair and give everyone extra 30marks. And again, by increasing each student by 30, and assuming this exam has no max marks, u just make everyone 30m higher. So the weakest is now 35 and assuming the best was 90m, now became 125. So 5 vs 90 and 35 vs 125, what difference does it make?

Using the first method seems to help close the gap between the two groups, the rich and the poor but this can only be temporary. Eventually, do u see the root of the problem?

Imagine you know, without any effort, you will just get extra marks, and knowing you deserve it because you are weak, will just motivate everyone else to remain weak. Then productivity of the entire class will drop. And don't forget you are not there alone, there are other classes (nations) that also compete with you. So eventually, the entire class collapsed by the action of the teacher (government)

What can be more disastrous is when this teacher (government) is corrupted - when currencies are created for a certain faction of the elites and rich.

Now, let's get back to real-life terms. imagine everyone has the amount of currency to spend.

Mr Poor has RM10

Mr Avg has RM22

Mr Rich has RM50

Now all of them wanted to buy Pizza that the price is RM10. Suppose there are 4 pizzas being produced and they all want more pizzas. Mr Rich can offer RM40 to buy all the pizzas right? But Mr Avg can offer higher, say RM15 for 1 pizza. This entices the seller to sell to Mr Avg, that's logical. Consequently, Mr Rich also up his offer, he may offer all he has, giving up RM50 to buy all 4. After all, he has the most among the three. That doesn't seem bad enough when there seems to be some room to compete and allow the market to adjust. Each has a limited amount of currency to real throw off the balance.

Now imagine, Mr Rich is given a boost to his wallet. The government printed an additional RM50 and gave it to Mr Rich and he has RM100. And now, he will take up all the Pizzas at whatever price he offers because there is no problem for him to obtain the currency he wants.

And eventually, pizza prices rise to RM20 each.

The Mr Avg will be poorer because he is left with RM5 and Mr Poor will die hungry.

See how dangerous things can be when a nation does not move and improve?

Remember, we are all in the same “class” competing against other classes (other nations). Of course, you could have the choice to ask for a transfer to another class to make yourself better.. but why save yourself when we can all work together to save everyone?

Mr Low Chin Ann is the founding director of Genesis Origo. , also lecturing the ACCA Professional Accounting programme