Saving money goes beyond just acquiring more wealth. While this is a worthy objective, the rationale for saving money often comes from a desire to reach a specific and tangible personal goal. Planning your finances is always a good idea, and your savings act as a safety net if the economy takes a downturn.
Countries can’t just print money and give it to you. When countries have too much money in circulation, they risk inflation, which occurs when the increase in money supply is greater than the economy can keep up with. The cost of living increases while the value of money decreases.
The government and, by extension, you, can run into financial problems when they print too much money. Inflation is the first thing that comes to mind because of a very noticeable effect: prices rise.
In this article, I’ll discuss why governments cannot print money at will and why it’s essential for you to save.
If you’re struggling to save money with the increasing cost of living, check out this article: Can’t Save Money Because of Bills? Here’s What I Did:
The Economy Is Based on Productivity and Spending
The economy is a vast subject, but at its core, it’s pretty simple. The economy is a marketplace for goods and services—that’s it. It doesn’t do anything else.
If everyone stops buying things, the economy will grind to a halt. Every time you make a purchase, whether a pair of shoes or a new computer, you’re helping keep the economy going and creating an incentive for others to spend their money.
If a product is not purchased, it will stop being produced, and it won’t get distributed. If it isn’t sold, those who created it don’t make any money, which means they won’t be able to save money themselves or contribute to the economy by making more of that product.
Consumption is one of the primary sources of economic growth. Through consumption, we grow the economy by creating jobs and stimulating production. We also develop the economy by being more productive and increasing our income.
Without spending, there would be no new demand for products or services. Without new demand, there will be no need for businesses to hire people to make or provide them. This would result in the economy coming to a grinding halt.
The concept of consumerism is often seen as a positive one because so many jobs are created due to people buying things they want or need. The downside is that consumerism leads to overproduction and waste, both of which can create environmental problems.
It’s important to remember that consumerism isn’t just about individual purchases—it’s about creating an economic system in which everything has monetary value.
The Federal Reserve Manages the U.S. Money Supply
The Federal Reserve (Fed) is the central banking system that serves as the “engine of the economy” for the United States and manages the money supply.
It does so by implementing monetary policy, which is a fancy way of saying that it decides how much money will be in circulation. The main goal of monetary policy is to keep inflation in check and support healthy economic growth.
Below you see the money supply (M2) going back to 1980. Basically, the chart shows how much USD is in circulation. If this chart increases too fast, it leads to inflation. The crazy money-printing during the COVID pandemic lead to the current inflation we’re seeing:
The Federal Reserve was formed in 1913 after banking panics in 1907 led to bank failures and unsafe practices. This crisis prompted Congress to pass the Federal Reserve Act of 1913, which established the Federal Reserve System that we have today.
Their role in the economy has expanded since then, and its focus has shifted to fighting inflation and keeping unemployment low while also managing interest rates.
As bank regulators, the Fed is interested in the safety of U.S. banks and their stability, as well as that of individual consumers, who are at risk if banks go under.
In addition to its regulatory role, the Fed acts as a bank by providing short-term loans to depository institutions and buying government bonds to keep interest rates low.
Suggested reading: Two Great Reasons to Save Money During Inflation
The Fed’s most important function is monetary policy, which manages the U.S. money supply. In turn, through monetary policy, the Fed can change how much cash there is in circulation among banks and consumers at any given time, directly impacting how much purchasing power individuals have.
Here’s why they can’t just print money and give it to people:
Printing More Money Makes Existing Money Worth Less
When the government prints more money, it’s likely to cause inflation.
Printing more money makes the existing money worth less. It’s a complex concept to wrap your mind around, but it’s easy to see how it works.
Think of it this way: when you go to the store and buy a can of peas for $1, you’d think that’s a good deal. But if the government decides to double the supply of dollars, then that can of peas is suddenly worth $2 at the grocery store. Prices go up because there are twice as many dollars but the same amount of value.
Prices will rise as a result—your dollar won’t buy as much as it did before, and you’ll need more dollars to get what you want.
That’s why the government can’t just print money and give it to you, necessitating savings.
Suggested reading: Saving vs Investing During Inflation: What’s Best?
To underscore the danger of excessive money-printing, let’s take a look at an economy wrecked by “hyper-inflation”:
The Case of Zimbabwe
The landlocked country of Zimbabwe is located in Southern Africa. It was once known as Rhodesia, but it officially changed its name when it gained its independence in 1980. Zimbabwe is surrounded by countries such as South Africa, Botswana, Zambia, and Mozambique.
The country has a long and rich history, including having been an ancient kingdom with its own unique culture. Still, it struggled through colonial rule, civil war, and economic difficulties after becoming an independent nation.
Zimbabwe’s economy is renowned as one of the worst in the world, with inflation between 1980 and 2021 estimated at 686% per year. This means that a product or service that cost 100 Zimbabwean dollars in 1980 costs around a whopping 345,814,511,510 Zimbabwean dollars today.
Zimbabwe faced hyperinflation in 2008, with average prices doubling every 25 days. Inflation peaked in November 2008 at a rate of 79,600,000%. Zimbabwe’s hyperinflation was perpetuated by the government being unable to control its monetary supply.
The advent of Zimbabwe’s hyperinflation can be traced back to several causes:
- A debt crisis
- Political policies that encouraged spending
- An excessive amount of money in circulation relative to the number of goods and services produced
The government sought to fix these problems by printing and distributing bond notes with a face value of one million Zimbabwean dollars that could be used as legal tender to curb hyperinflation.
Although this seemed like an excellent idea on the surface, it didn’t work because it only increased the amount of money in circulation and worsened matters.
This desperate attempt at an economic recovery caused the price of goods to skyrocket, leading to the government limiting how much money could be spent and how many businesses could be opened. These boundaries encouraged the growth of black markets and led to more confusion within the country.
The case of Zimbabwe is an excellent example of what happens when inflation goes out of control due to too much money being in circulation.
Suggested reading: This Is How Much People Save Per Month, On Average
Earn an Income and Save Money To Combat Inflation
Even though saving money can’t make you rich, it is vital for a lot of reasons.
It gives us security, and it ensures that we can afford things when we need them. However, these are not the only points on why saving money is essential. There’s also the fact that it helps to combat inflation.
As we’ve discussed, inflation is a force that erodes the value of money. It’s good to be aware of your spending and saving habits if you want to keep your purchasing power.
This is important if you have a specific goal or item in mind that you’d like to reach for. Every time you save money, it’s an investment in another future purchase. If you’re saving for something big, like buying a house or starting a family, then inflation can significantly affect what you can afford.
Inflation is an insidious thing and can creep up on you without you knowing it. It’s likely that you won’t even notice it’s happening until it’s too late, and then you’ll have to wonder why the money you’re spending just doesn’t seem to go as far as it used to.
When you’re saving money, you’re ensuring you can deal with unexpected expenses and unforeseen changes in your budget. This makes savings essential to help cushion economic downturns and other events that could leave you with less cash than you need to get by.
While any increase in inflation could decrease the value of your savings, you’re always better off having extra cash than without.
That said, earning an income and saving money go hand in hand.
By earning money through an income source you can count on, you’re working to increase your buying power and offset the effects of inflation over time.
When you earn money through a job or some other reliable income source, you build up a savings account that affords you more purchasing power as the years pass.
The ultimate way to combat inflation is to make yourself a valuable asset in the economy. If you work hard and create real value, then it shouldn’t be difficult for you to look for a new job if need be.
Another way to combat inflation is by actively participating in our consumer economy. The more we spend money on goods and services we need and want, the more businesses will feel encouraged to produce more goods and offer more services, which directly leads to creating jobs.
This means we’re helping not only ourselves but everyone else around us!
If you’re looking for ways to save more money, you’ll find this article helpful: The 4 Steps To Save A Lot Of Money Fast
If you are a consumer, then in a genuine sense, you are an investor. The money you spend is ultimately responsible for sustaining businesses and the economy.
There is no way to avoid the effects of inflation. However, by contributing to the economy, making an income, and spending your money, you can help maintain the value of your dollar.
While this information is nothing new, it can be challenging to digest. Nonetheless, it’s essential to be aware of it when deciding how much of your money you want to keep in cash reserves.