It seems that the US government is hell-bent on protecting the economy and this was highlighted in the first week of May when it said it would borrow an estimated $3.7 trillion this fiscal year to cover all of the Covid-19 bailouts. But this wasn't to be enough as the Treasury Department announced a few days later that the amount would be increased to $4.5 trillion. For their part, the Federal Reserve are printing trillions of dollars, an action for which there will certainly be consequences.

Paper money creation allows the government to spend more but it has been known for centuries that printing money can at the same time create inflation. History has shown that those countries which have tried to print money to get themselves out of trouble never succeed, from Wiemar-era Germany to Zimbabwe in the 2007-09 period and Venezuela currently.

One type of inflation which we all tend to keep an eye on is Consumer Price Inflation, more often known as CPI. It is a measure over time in the prices paid by consumers for a market basket of consumer goods and services. This index doesn't include food and energy prices as these tend to be quite volatile, so it therefore covers things such as cars, clothing, consumer goods and services, housing, transportation costs, recreational activities, education and other general services. Back in the 70s, the CPI got to a high of 13.6% but as of February 2020, is was 2.3%. The reason for this drop is globalization as the cost of manufacturing has fallen considerably as production sites have been moved out of the US to developing countries where wage rates are lower. So as long as globalization exists there will be downward pressure on wages and therefore little core inflation.

However, an example of the damaging effect of money printing was the Quantitative Easing by the Federal Reserve back in 2008. As a result, the value of the dollar declined and as it kept falling, investors moved into the safe haven of commodities. The negative effects from this were felt far from US shores as the prices of soy, wheat and other staples were pushed up. In the UK, the knock-on effect resulted in a 9.8% rise in food prices compared to the previous year and imported foodstuffs rose by 4.5%. For the billions of people living on meager earnings in third world countries, this created a humanitarian disaster.

Paper money creation has a long and ignoble history and it has almost always ended in tragedy. The great American economist Irving Fisher said “Irredeemable paper money almost invariably proved a curse to the country employing it.” Time will only tell in the case of the United States.

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