It seems like basic logic, right? The more of something that exists, the less valuable it becomes. Rare baseball cards are worth thousands; common ones are worth nothing.
So if the government keeps printing more money, shouldn’t each dollar become worth less and less until it’s basically wallpaper? You’re not wrong to think that — but the full story is way more interesting than “money printer go brrr.”
The Economy Grows — So Money Needs to Grow With It
Here’s the thing most people miss: the amount of money in an economy needs to roughly match the amount of stuff being produced and sold.
Imagine a tiny island with 10 people, 10 coconuts, and $10 total. Each coconut costs $1. Perfect. Now the population doubles to 20, and they grow 20 coconuts — but there’s still only $10 on the island.
What happens? Each coconut now costs $0.50. Sounds great — everything’s cheaper! But here’s the dark side: nobody wants to sell coconuts because the price keeps dropping. Why sell today when it’ll be cheaper tomorrow? The economy freezes. People hoard cash instead of spending. This is called deflation, and it’s an economic nightmare.
So the island’s central bank creates $10 more. Now 20 coconuts cost $1 each again. Balance restored. That’s essentially why money supply needs to grow: because the economy grows. More people, more businesses, more goods — they all need more money to keep things running smoothly.
What Happens If You DON’T Print Enough? Deflation.
Most people fear inflation (prices going up). But economists? They’re even MORE terrified of deflation (prices going down). Here’s why:
- Consumers stop buying. “Why buy a TV today if it’ll be cheaper next month?” Everyone waits. And waits.
- Businesses stop investing. Why build a new factory if the stuff you make will sell for less and less?
- Wages fall. If companies earn less, they pay less. Or just fire people.
- Debt becomes crushing. You borrowed $300,000 for a house, but your salary drops while the mortgage stays the same. The debt feels heavier every year.
- A vicious cycle begins. Less spending → less profit → layoffs → even less spending → more layoffs.
Japan experienced exactly this for nearly 30 years — the infamous “Lost Decades” from the 1990s to 2010s. An entire generation grew up in an economy that barely moved. This is what central banks are desperately trying to avoid.
The Goldilocks Zone — Not Too Much, Not Too Little
So how much money should exist? Central banks generally aim for about 2% inflation per year. Why not 0%? Because a small, predictable amount of inflation is actually healthy:
- Encourages spending and investing — your money loses value sitting still, so you’re motivated to put it to work
- Makes debt manageable over time — a mortgage that felt huge in 2000 feels lighter in 2025 because wages have risen
- Gives central banks room to maneuver — they can lower interest rates during a crisis; with 0% inflation, there’s no room
Think of the economy like a treadmill. It needs to keep moving forward. 2% inflation is the gentle pace that keeps everyone walking. Too fast (high inflation) and people can’t keep up. Too slow (deflation) and the whole thing grinds to a halt.
When It Goes Horribly Wrong — Hyperinflation Horror Stories
Of course, sometimes governments DO go overboard with the money printer. Here’s what happens:
Germany (1923): Post-WWI Germany printed money to pay war debts. Prices doubled every few days. A loaf of bread cost 200 billion marks. People literally used banknotes as wallpaper — the paper was worth more than the currency printed on it.
Zimbabwe (2008): The government printed money to cover its bills. Inflation hit 79.6 BILLION percent per month. They printed a 100 trillion dollar bill worth about $0.40 USD.
Venezuela (2016–present): Excessive money printing led to inflation exceeding 1,000,000%. People weighed cash instead of counting it.
The pattern is always the same: too much money → chasing too few goods → prices skyrocket → trust evaporates → economic collapse. The lesson? Money creation isn’t bad — reckless money creation is catastrophic.
How This Affects Your Everyday Life
“Cool theory. But what does this mean for MY wallet?”
1. Your savings are slowly melting: With 2–3% inflation, $100 today buys only about $74 worth of stuff in 10 years. This is why financial advisors beg you not to leave everything in a checking account. You need to invest just to stay even.
2. Wages (should) rise too: In a healthy economy, wages grow roughly with inflation. The problem is when inflation outpaces wage growth — that’s when you FEEL poorer even if your paycheck looks bigger.
3. Fixed-rate debt gets easier: If you have a 30-year mortgage at a fixed rate, inflation is your friend. You pay back old debt with “cheaper” future dollars.
4. Cash is a melting ice cube: The longer you hold it, the less it’s worth. This isn’t a bug — it’s a feature. It’s designed to push you to invest, spend, or grow the economy rather than hoard bills under your mattress.
Bonus Fact
The word “inflation” comes from the Latin “inflare,” meaning “to blow up” or “to puff up.” It was first used in a monetary context in 1838. Before that, it just meant making something physically bigger — which, when you think about it, is still pretty accurate when it comes to prices.
Wrapping It Up
So why do they keep making more money even though it loses value? Because the alternative — not making enough — is even worse. A growing economy needs a growing money supply, like a growing city needs more roads.
The trick isn’t to stop creating money. It’s to create just the right amount — not too much (hyperinflation), not too little (deflation), but just enough to keep the engine running at about 2% per year.
Your job? Understand that inflation is baked into the system by design, and make your money work harder than the 2–3% annual erosion. That means investing, not just saving. Because money sitting still isn’t really standing still — it’s slowly shrinking.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Please consult a qualified financial advisor before making any investment decisions.
Sources
- Federal Reserve — Why Does the Fed Aim for 2 Percent Inflation Over Time?
- International Monetary Fund — Inflation: Prices on the Rise
- Bank of Japan — Japan’s Experience with Deflation (Research Paper)
- Investopedia — Hyperinflation: Definition, Causes, and Examples