Let's say a small hypothetical country needs a billion dollars to build a new highway. It can either spin up the printers and create money from nothing, or it can borrow the same amount of money from foreign investors.
Based on some research, printing money is considered bad because it causes inflation and loss of investor confidence, but surely if you borrow it from a foreign investor, it's still going to cause the same amount of inflation? And whilst technically it's money the country will pay back, almost all countries have debt which keeps on growing.
So, why is one considered bad, and the other just business as usual?
Why is printing money bad, whilst borrowing from foreign sources okay? Isn't it still money entering the economy?
byu/epiclevellama inAskEconomics
Posted by epiclevellama
2 Comments
In order to lend money to the US government, you have to obtain those USD by selling goods and services into the US economy, which transfers USD away from people that purchase those goods and services.
The answer by heuristic_al is essentially correct, but I think it’s too brief.
> … but surely if you borrow it from a foreign investor, it’s still going to cause the same amount of inflation?
This is the problematic part. We have to remember that countries spend in their own currency in the vast majority of cases. They also borrow in their own currency in the vast majority of cases.
For example, let’s suppose that the US borrows $1B. It sells bonds on the international market to do that. I buy some from the eurozone. Now, what happens in this case? I must obtain US dollars in order to buy the bonds. I must sell something that allows me to obtain dollars – probably I will sell euros. Then I have a balance of dollars that I can use. I then buy the bonds. If I’m buying new bonds that transfer the dollars to the government. As a result, the sale of bonds does not introduce new dollars into circulation. It only moves them through circulation.
The same is also true if the government borrows in a foreign currency, since in the case the government must perform the forex conversion to spend the money within it’s own economy.