USA MONEY PRINTING STRATEGY
We all know that printing money is very very unhealthy for an economy and every time a country has attempted to print money it has led to disastrous consequences for example in the 1920s the Weimar government printed over 500 billion paper marks and in just three years inflation rate in Germany got so bad that at its worst it took 4.2 years trillion paper marks just to buy one us dollar similarly when Venezuela printed 4 trillion Bolivars by 2020 their inflation rate reached over 4200 percent and guess what in 2020 the United states of America printed 3 trillion dollars in just 3.5 months but guess what strangely while in other cases of currency printing those countries experienced hyperinflation in case of U.S. inflation barely touched nine percent in fact this had a reverse effect whereby instead of inflation increasing just in the U.S. inflation actually got exported to other countries all across the world which means although U.S. printed three trillion dollars inflation actually increased in other countries instead of just in U.S. in fact the inflation that you are experienced in India right now is also partly due to the money printing that happened in the U.S. in 2020. And this is due to the secret superpower of the U.S. dollar and if you only understand this dollar superpower properly you will be able to understand a critical concept of the U.S. economy and world Trade itself so in this article let’s try to understand how is U.S. economy immune to money printing how did the U.S. printing money cause inflation in India and other countries.
WHY DOES THE USA PRINTING A LOT OF MONEY?
To understand the money printing superpower of the US you first need to understand something called quantitative easing now again this might sound very complex so as usual let’s try to understand this using a simple story you see guys just like we learned from our RBI article which I easily explained how RBI lends money to HDFC bank which then gets lent to people like you and me and just like in the US the Federal Reserve lends money to the bank of America which then lends money to people like you and me so let’s say the interest rate that the feds charge the Bank of America is 6.15 percent than what will Bank of America do Bank of America will lend this money to a Mr. Jackson at 8.25 percent interest and make a two percent profit so let’s say Bank of America gave a loan of three hundred thousand dollars to Mr. Jackson at 8.15 percent interest now when inflation spikes if the Federal Reserve realise the interest rate from 6.15 percent to 6.25 percent so even bank of America will have to increase the home loan interest rate form 8.15 to 8.25 to make a profit and if you look at the impact of this change in interest rate on loans it’s very very significant to give you an example of the same let’s say Mr. Jackson has taken out a home loan of three hundred thousand dollars on a 20 years tenure and makes eight thousand dollars per months so if the interest rate goes from 7 in April 2022 to 9.25 in Jan 2023 the Emi would go from two thousand three twenty-six dollars to around two thousand seven forty-eight dollars to repay the exact same loan within the original tenure and this is an EMI increase of 18 percent so let’s say Mr. Jackson’s effective saving at the end of all expense is about fifteen hundred dollars but now after the increase in interest rates when Mr. Jackson pay s422 extra in his emis Mr. Jackson will only have 1078 dollars to spend and in total for the entire year his purchase power will decrease by 422 dollars into 12 months that is by 5064 dollars so as you can imagine when the Jackson family has 5064 dollars less in their budget for the month in order to make up for this extra cost the jackson familu will cut down on car purchase they cut down so on outings and they will cut down on all luxury purchases similarly when homw loan interest are incerased all across the america million of Americans will buy less cars spend less on clothes and spend less then the deman dof products will go down eventually the businessess will have to decrease our products to mke tit affordable for their customers os if a cars costs two hundred thousands dollars thousands of people like Mr. jackson will not win consider buying a car because they can only offer to buy a car at 160 000 and that too with a car loan. so if Volkswagen was selling a car in the US for 200 000 they will have to decrease the price to 160 000 so that more people could offer the car but at the same time the problem with Volkswagen is taht even their cost of production has gone up semiconductor shortages have made semiconductors more costly gas prices have increased due to the Russia Ukraine war and shipping costs have also shot up so the cost of production has increased so much that they just cannot afford to sell the car at below 165 000 so you see this is where the economy of us got stuck the buyers do no have money to buy products at moe than one sixty thousand dollars and the sellers cannot decrease their price beyond 165 000 because the cost of production has increased so in the market if the buyers don’t by and the seller can not sell it’s basically an economy nightmare because there is no money flowing into the market and this is what recesssion looks like now the question over here is what can the Federal Reserve do to fix this problem.
Well this is where we have something called quantitative easing in a simple world quantitative easing is a method whereby the U.S. federal reserve lowers the interest rates and creates dollars in the economy to get the market working now this might sound complex so let’s try to under this using a short story so just like federal Reserve lent money.
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