Printing money, you may hear it all the time in economics discussions from economists in every rapid evolving field, from financial types, from reporters and everyday news consumers, and from politicians across the spectrum. For some participants, it’s the most bitter invective you can hurl. It explains the moral decline of nations, and the world. Even less enthusiastic discussants attribute great economic power to the act.
What in the heck does money printing mean? What should it mean? What are useful ways of talking about it, and hence thinking about it?

Try starting with one bare assumption, a more precise definition of “pouring money”. Money-printing adds assets to private-sector balance sheets. A king mints some tin coins, or a government prints bills, and they pay people and firms to produce goods and services or they just give the money away. They’re adding to the asset side of private-sector balance sheets. Recipients have more money or banks issue loans to people and businesses or even more assets on private-sector balance sheets.

Printing Physical Money start with physical currency like coins and bills. Is printing money actually money-printing? In a rather idealized world, sure. The queen or the temple authorities mint a whole bunch of tin coins and use them to pay workers. The workers have more balance-sheet assets, created out of thin air. Those coins are just handy physical tokens provided by government, which make it easy to transfer assets from one person’s balance sheet to another.

But in the modern world where most assets are held in bank and brokerage accounts, it’s different. When a bank depositor withdraws cash, the bank just marks down their deposit balance by the same amount as the cash withdrawn. It’s just an asset swap: you have more dollar bills on your balance sheet, and less bank-deposit assets. The bank has less cash, and also less liability to pay out cash to you in the future. The amount of private-sector assets doesn’t change only the portfolio mixes changes.

If depositors want more cash for transactions and the bank is short on vault cash, it can ask the central bank for more. Just like a bank depositor, it receives cash, and the central bank marks down the bank’s deposit balance. Again, it’s just an asset swap, a portfolio shift. There’s no change to total private-sector assets.
But the real consequences are printing more money doesn’t increase economic output as it only increases the amount of cash circulating in the economy. If more money is printed, consumers are able to demand more goods, but if firms have still the same amount of goods, they will respond by putting up prices. In a simplified model, printing money will just cause inflation.

Let’s see the simple illustration here, suppose an economy produces $10 million worth of goods; e.g. 1 million books at $10 each. At this time the money supply will be $10 million.

If the government doubled the money supply, we would still have 1 million books, but people have more money. Demand for books would rise, and in response to higher demand, firms would push up prices. The most likely scenario is that if the money supply were doubled, we would have 1 million books sold at $20. The economy is now worth $20 million rather than $10 million. But, the number of goods is exactly the same. We can say that the increase in GDP is a money illusion. – True you have more money, but if everything is more expensive, you are not any better off. In this simple model, printing more money has made goods more expensive, but hasn’t changed the quantity of goods.

Now you may ask why is inflation such a problem? Inflation will cause
• Fall in value of savings. If people have cash savings, then inflation will erode the value of your savings. £1 million marks in 1921 was a lot. But, due to inflation, two years later, your savings would have become worthless. High inflation can also reduce the incentive to save.
• Menu costs. If inflation is very high, then it becomes harder to make transactions. Prices frequently change. Firms have to spend more on changing price lists. In the hyperinflation of Germany, prices rose so rapidly people used to get paid twice a day. If you didn’t buy bread straight away, it would become too expensive, and this is destabilising for the economy.
• Uncertainty and confusion. High inflation creates uncertainty. Periods of high inflation discourage firms from investing and can lead to lower economic growth.

To a certain extend, if a country prints money and creates inflation, then there will be a decline in the value of the currency. If the government print too much money and inflation get out of hand, investors will not trust the government and it will be hard for the government to borrow anything at all. Therefore, printing money could create more problems than it solves.