1: Have you ever wondered why countries can't just print more money to off their debts.

5: or to feed the homeless or fix unemployment, or any other issue for that matter?

9: Now, this may seem like a rather silly question, but I think it may be one of those questions

13: people might be a bit too embarrassed to ask, but there's no shortage of people wondering.

17: The short answer can be summed up in just one word. inflation. Inflation is defined

22: as "a persistent, substantial rise in the general level of prices related to an increase

26: in the volume of money and resulting in the loss of value of currency".

29: But I'll get to that. first though, we need to establish exactly what money. is. Now

37: this may seem obvious, but something that's important to know, is that money, has absolutely

41: no. intrinsic value. What that means is that money in itself has no actual value,

47: it's only considered valuable because it can buy things, but if you were stranded on a

51: desert island, money would be totally useless. Money only has value because we believe it

57: has value. This is called the Tinkerbell Effect, something I learned about from Vsauce.

62: The Tinkerbell Effect is used to describe something that only exists because we believe

66: it exists. And this is the case with money. Hypothetically

70: speaking, if people suddenly started to believe that money had no value. it wouldn't have

74: any value. Of course it wasn't always this way, money

78: has been around for millennia, and when it was first used it was in the form of commodity

82: money. Things were traded that had actual value and uses, like salt, spices, horses

87: or weapons. As well as this precious metals such as gold as silver, which technically

91: don't have any intrinsic value either, but due to their rarely are almost universally

96: as currency. Then we have representative money. Since carrying

100: around everything you own can be difficult, representative money makes more sense. Basically

104: you give your gold to a bank and they keep it safe for you, and in return they give you

108: a piece of paper acknowledging that you own that gold. These pieces of paper can therefore

113: used as money as anyone can go and redeem the gold at any time.

117: But today, almost every country in the world uses fiat money. Fiat money requires faith

122: and trust in the government that their money will have value.

125: If we use a relatively young country as an example, the United States has gone through

128: all three monetary systems within 200 years. In 1792, when the US stopped using European

135: money. The Coinage Act of 1792 brought the inception of the US dollar. The US dollar

139: was originally in the form of commodity money in the form of gold, silver and copper coins.

144: The coins were actually made from real gold, silver and copper, and the value of the metal

148: that made the coins, were exactly equal to their face value.

152: The country then moved onto a mixture of commodity and representative money with the 1900 Gold

156: Standard Act. The government issued dollar bills which could be exchanged for gold at

161: any time. Gold Standard is a type of representative

164: money that money countries used at the time. This was an effective way to accurately calculate

168: the exchange rate between countries. For example, if one gram of gold costs £1

173: in Britain and $1.50 in America, then you can easily deduce that £1 equals $1.50.

179: Gold coins were discontinued and the silver was removed from the other coins, effectively

182: ending commodity money. In 1971, Richard Nixon officially abandoned

188: the Gold Standard, and the US moved onto fiat money.

191: So money today isn't back by gold or anything else of value for that matter.

196: So back to the question at hand; basic economics tells us that an increase in supply, results

200: in a fall in demand and therefore a fall in price. So the more money in the economy, the

205: lower the value of each dollar. Meaning other countries can purchase more dollars in exchange

209: for their currency. A second supply and demand graph shows why

212: this leads to a rise in prices. More money in the economy causes a shift in the demand

216: curve for goods and services, but since this isn't matched by in increase in economic output,

221: prices must rise. Look at it this way, if the government printed

224: a million dollars and posted it to everyone in the country, causing everyone to go out

228: to buy a sports cars. but there's only a finite number of sports in the country.

237: If we use an analogy to demonstrate this. imagine there's 4 people on a desert island,

241: they each have 10 pieces of fruit each. All fruits are considered equal in value.

245: Now imagine they discover a whole forest of apple trees. The nominal value of apples has

250: increased because there's more of them, but the actual value of an apple has gone down

254: due to an increase in supply. Therefore it now costs 10 apples for 1 banana

259: since demand for apples is low, but high for bananas.

263: Just to clarify, in this analogy, the people represent different countries, the fruits

267: their respective currency, and the apples tree is the printed money.

271: But it's not only because of economic theory that we know printing too much money is bad

275: idea, there's several examples throughout recent history.

277: The most recently example is Zimbabwe. Who, in 2008, suffered extremely high inflation

283: due to printing money. This was the result of some awful decisions

286: by the president Robert Mugabe. When the economy took a turn for the worse,

290: Mugabe printed more money to pay government expenditure.

293: This caused inflation to skyrocket, and, in mid-November 2008, Zimbabwe's inflation peaked

298: at. actually wait hold on a second, first I need to provide some context.

303: Inflation in the United States is around 2%, economists generally agree that inflation

307: level around 1-3% are optimum. First-world countries' inflation rates today range from

311: 0-5%. A country is said to have enter hyperinflation when their inflation levels exceed 50%.

317: So. with that in mind, Zimbabwe's inflation, at its peak, reached. 6.5. sextillion

324: %. Or to put it another way. that number has 22 digits.

333: It got so bad that prices doubled every 24 hours. The government tried to solve the problem

338: by printed more and more money with higher and higher denominations.

341: They also kept knocking zeroes off the end by re-valuing the Zimbabwean dollar 3 times,

346: going through 4 different types of currency with 4 different ISO codes.

349: Before the final re-denomination, they were printing 100 trillion dollar bills.

354: People were literally using wheelbarrows full of cash to buy a loaf of bread.

359: The government even made inflation illegal at one point and people were actually arrested

363: for raising prices. In 2009, the Zimbabwean dollar was abandoned

367: and to this day they still have no national currency, their people use currencies such

371: as the US dollar, the Pound Sterling, and the Euro. Before the hyperinflation, the first

376: Zimbabwean dollar was worth about 1.25 US dollars. If that 100 trillion dollar bill

382: was worth that exchange rate, that single bill would be worth more money than there

386: is in the entire world. twice. But as ridiculous as this was, this is only

395: considered to be the second worst inflation in history, after Hungary in 1946.

401: Although Zimbabwe's inflation peaked in Mid-November of 2008, their overall highest monthly inflation

406: was 79.6 billion %, whereas Hungary's highest monthly inflation which took place in July

411: 1946 was 41.9 quadrillion %. With prices doubling every 15 hours.

418: To put that into perspective, a country with a healthy inflation level of around 3%, prices

424: double every 23 years. Their currency was called the pengo, and as

429: inflation rose, the bil-pengo: short for billion pengo. Which is actually one trillion pengo

435: on the short-scale. As well as the record for the highest monthly

439: inflation, Hungary also holds the record for the highest denomination banknote ever issued

443: - the 100 million bil-pengo note. (ie - 100 million billion, or 100 quintillion). Which

448: is 100 quintillion pengo on the short-scale. 1 milliard bil-pengo were printed but never

454: issued. In 1941, the exchange rate was about 5 pengo

459: to 1 US dollar. In 1946, when the currency was discontinued, things had gotten so out

465: of hand, that if you took every single banknote in the entire county, they would have a total

470: value. of one tenth. of a US penny. Hungary then switched the the forint, where

479: 1 forint equalled 400 octillion pengos. That number has 29 zeroes.

487: So that's why government can't just print money to pay off their debts, it does not

491: end well. It's also important to understand exactly

496: what national debt is. National debt is much more complicated than personal debt. It isn't

500: simply a case of 'you owe people money'. Take the country with the highest National Debt

505: - the United States, that currently has around 17 trillion dollars of debt, and you're probably

510: aware the country holds most US debt is. China. Although that is true, it's somewhat

517: misleading. Of the total debt, China only has about 8%. Most of the debt is actually

522: owned by the United States government itself, but organisations such as Social Security

527: or the Federal Reserve. On top of this, a further 30% is owned by

531: US citizens.And even though 8% of 17 trillion is still a lot, China can't just knock on

536: the door of the White House and demand 1.2 trillion dollars. It doesn't work like that.

542: Basically, the US Department of the Treasury issue treasury bonds. You can buy these bonds

547: and the government will pay you interest on that bond every year, then, once the bonds

551: have matured, they'll buy the treasury bonds back from you.

554: Now, if a country gets into financial trouble, it may have to default on its debt, which

558: basically means you won't get your money back. But the US is generally considered an extremely

563: risk-free investment because the US dollar is the most widely used and most trust-worthy

567: currency in the world. It's even written into the Constitution that the United States cannot

571: default on its debt. I'll leave you with this final thought and

576: what I think is possibly the best way to sum up why governments can't just print off unlimited

580: amounts of money. "If money grew on trees, it would be as valuable

586: as leaves" Thanks for watching!