Why Bangko Sentral ng Pilipinas Won’t Print More Money?

Money is an integral part of anybody’s life. It is used to buy necessities and other commodities for daily usage and consumption. Business enterprises essentially run because of the money that comes in. People seek employment to earn money through compensation. However, despite the different ways available, many people do not have enough money and poverty still exists.

Some people may end up thinking why is the government not making more money? Considering that the Bangko Sentral ng Pilipinas is tasked in producing money, why not print more bills and give it to the poor? Wouldn’t it end poverty if everyone has money?

The thought of everyone having money to buy all necessities and wants seems to be a really good idea. However, if you would ask an economist, he would probably say it’s a terrible idea. But why is having more money a terrible idea? The reason behind all this is inflation.

Inflation is the sustained general increase in the price of goods over some time. It is often expressed in the rate of increase or percentage change of prices on goods or services. Inflation does not always bring a negative impact on the economy. Controlled inflation may be beneficial to economic recovery, while if it is too high, it will cause the economy to suffer. Below are some of the negative effects of inflation:

You may have heard your grandparents telling you stories of what they can buy with just one peso; a kilo of rice, a few fishes and some vegetables, you can cook a decent meal with just one peso. However, a peso today does not worth as it used to be, you can probably just buy candy with it. Inflation throughout the years causes the purchasing power of a currency to decrease.

Purchasing power is the number of goods and services that can be purchased from a unit of currency or monetary unit.

Let us say the Central Bank of the Philippines decided to create more money and distribute hundreds of thousands of pesos to each individual. Having this amount of money, everyone will be going to stores and purchase pieces of stuff. While demand increases, businesses will then increase the price of commodity as many people can afford it.

What if the company chooses not to increase the price? They will then need to produce more products and employ more people to meet the demand. Considering everyone has hundreds of thousands of pesos, will they settle for a low salary? The answer is most probably, no. Businesses will need to offer higher salaries which will eventually lead to an increase in price.

Savings will also be affected if the prices of commodities increase. For example, you have been saving money for you to buy a house worth ₱ 2,000,000. After 5 years, you were able to raise this amount of money, however, at this time the country is also experiencing inflation. The house you wanted to buy is now worth ₱2,500,000. Your savings is no longer enough to buy the house you wanted and will need you to save more.

Inflation is quite common to every country, in some cases, it can be beneficial to the economy. However, a country needs to have this under control, if not, it may lead to hyperinflation.

Hyperinflation is the dramatic acceleration of inflation. It immediately diminishes the value of the currency. It may happen in rare cases but if this occurs, it will result in an economic crisis. The surge in the production of money will give no benefit as resources begin to scarce.

One of the most notable hyperinflation incidents in history is the hyperinflation in Zimbabwe. In which prices were double every single day and the estimated inflation rate for November 2008 was 79,600,000,000%. Earning a daily wage of $20 million is still not enough if the price of a loaf of bread is $35 million. (Source: economicshelp.org)

The Philippines once suffered hyperinflation during World War II. Japanese Government who occupied the Philippines issued fiat currencies for general circulation. Due to fiat money’s lack of value, it was called “Mickey Mouse money”.

Survivors of the war often tell tales of bringing suitcases or bayong (native bags made of woven coconut or buri leaf strips) overflowing with Japanese-issued bills. During this time, a box of matches cost more than 100 Mickey Mouse pesos. The highest denomination in 1942 was 10 pesos.

But because of inflation at the end of the war, the Japanese government was forced to issue 100-, 500-, and 1000-peso notes. It had and experienced a peak mark of 60% inflation in January of 1944. (Source: Wikipedia)

Bangko Sentral ng Pilipinas is the central monetary authority in the Philippines, it has a big responsibility in maintaining a sustainable economy through supervisions of banking operations and exercising its regulatory powers towards non-bank financial institutions. It must carefully form policies and decisions to prevent a downturn of events that could bring high inflation and rapid unemployment.

In general, the government prints money to replace old ones, keeping the supply of money in the economy balanced. However, in some cases BSP might consider printing additional money to be circulated, these include the following:

Inflation isn’t always a bad thing, as long as it is controlled, it may help in the growth of the economy. Since BSP has the sole ability to influence the amount of money circulating in the economy, its monetary policy promotes price stability. Following the assumption that there is a stable and predictable relationship between money, output, and inflation; BSP can identify the money supply needed to achieve its targeted inflation rate to support the economic growth objective.

During a recession, in which there is a significant decrease in economic activity, printing more money may be necessary to avoid deflation. Deflation could create a negative impact on the economy as it reduces consumer spending and slows economic growth. Increasing the money supply would increase aggregate demand which could combat the recession.

Quantitative easing (QE) is a monetary policy in which the Central Bank purchases financial assets from banks and other financial institutions. The goal of this is to encourage banks to lend out money to businesses and individuals at lower interest rates that would increase spending and boost economic activity. Although this strategy increases the money supply, it does not involve the actual printing of bills, the Central Bank electronically creates money by increasing bank reserves.

Given the possibility of inflation, quantitative easing can be viewed as a last resort in an economic crisis.

This scheme has been recently adopted by the Bangko Sentral ng Pilipinas. During the COVID-19 pandemic, the Monetary Board authorized the BSP to purchase securities from the Bureau of Treasury under a repurchase agreement. This is to fund government programs in fighting the effects of corona virus.

Creating more money is not as easy as it sounds. Printing more money can cause harmful inflation while insufficient money supply can cause deflation which may also damage the economy. The Bangko Sentral ng Pilipinas has the important task of keeping this in balance.

We shouldn’t be dependent on our government to provide us our needs. We, as an individual can increase our money through our jobs, businesses, and investments.