Currency Debasement

The average Australian is feeling the financial strain. Grocery prices have skyrocketed since 2020. Property prices have risen outside the reach of many and rent in capital cities are a joke. For young Australians and low-income earners, the dream of owning a home feels increasingly out of reach. Meanwhile, retirees on fixed incomes are struggling to keep up with the rising cost of living. While plenty of blame is being thrown around, there’s little accountability or clear explanation. There’s little accountability or effort to provide a clear explanation for everyday people trying to understand why life feels so much harder.

Interest rates have risen in an attempt to curb inflation yet prices still rise far beyond what many can cope with. There’s been plenty of talk about how to fix the economy, but the media has largely overlooked an important question. How did we end up here in the first place?

Let’s rewind back to the year 2020 for a moment. The world had come to a standstill and our country was plunged into lockdowns that lasted for most of the next two years. Whatever your opinion on the effectiveness of lockdowns, they presented the government with a unique problem. Vast number of people couldn’t go to work. They were stuck inside and unlike their careers, their bills weren’t going to suddenly disappear. 

So what did Australia do? We turned the money printer on. In just twelve months, the country’s money supply almost doubled. To support those who had ‘lost’ their jobs, keep businesses afloat, and assist community organizations, the government distributed this new money. You cannot halt an entire economy without consequences. The government feared that once we reopened, nobody would be willing to go back out and live their lives after being told it was unsafe to do so for so long. To encourage spending, they printed even more money, offering payments to incentivize domestic travel and other activities. For example, Victorians could claim back up to two hundred dollars on a restaurant bill. This money didn’t come from nowhere did it now? The cost-of-living crisis we face today is a direct result of this influx of new money into the economy.

Currency debasement occurs when a country’s money loses its value, often because the government creates more money than the economy can handle. When someone asks, ‘Why can’t we just print more money?’ This is the reason. There was no doubt that halting our economy meant creating an urgent need for the government to step in and support everyday people. Very few normal people would have made it through lockdowns with no income. The real problem arose when the world began returning to normal

Think of currency debasement like adding too much water to a pot of soup. The more water you add, the weaker the soup becomes. Similarly, printing too much money ‘waters down’ the value of each dollar, making it worth less.

We hit pause on everything and added more money to the system. We didn’t bake more bread, build more houses, or produce any additional goods or services yet tthere was suddenly a lot more money circulating in the economy. If anything there was less production during covid. Then, we hit play again. People went back to their jobs, started paying their bills themselves, and resumed their normal lives. It was now out in our economy ready fueling higher prices for groceries and other essentials.

Think of it like an auction. If there’s only one loaf of bread but more people with extra money bidding for it, the price of that bread will go up. The same thing happens across the board. With more money chasing the same amount of groceries, houses, or fuel, sellers can charge higher prices because there’s more demand backed by extra cash.

The honest truth is that bread didn’t suddenly become more valuable at Coles or Woolworths. Your dollar is just worth less. Your home’s value hasn’t truly increased. Instead, the money you use isn’t worth as much as it was five years ago. It’s not that your house is worth more dollars—it’s that your dollar buys less house.

The good news is that there are ways to address the issue. The bad news is that politicians often avoid taking action when it is unpopular. Especially in an election year. 

In order to balance out all the “extra” money in the economy, the government has to rein in their own future spending. By slowing down spending, the government can offset the effects of newly printed money. By slowing down spending, the government can offset money from flowing through the economy until it balances out. Keeping it simple, if twenty million dollars is printed but the government holds onto twenty million dollars rather than spending it then it is like no new money has entered the economy at all. At least, that’s the idea in principle. 

Having a weak currency has its downsides but having a strong currency also has its benefits, especially for consumers. For example, in 2013 the Australian dollar was (briefly) worth more than the American Dollar (USD). Take 2013, for example, when the Australian dollar was briefly worth more than the US dollar. Without getting into the technical details, this made goods from the United States cheaper for Australian shoppers. iPhones, sneakers, and makeup cost less in Australia than they did in America at the time because one Australian dollar could buy more than one US dollar. However, a strong currency wasn’t good news for everyone. Australia’s beef industry struggled to sell its products to overseas markets because a strong dollar made our exports more expensive. In response, the government printed more money to weaken the currency. This decision was heavily influenced by political pressure from farmers, who made it clear that keeping the dollar high wasn’t an option. Consumers weren’t a consideration.

Unfortunately for us it is a federal election year and no politician wants to risk the backlash that comes with cutting government programs. Let’s be honest, no one wins elections by cutting government handouts even if it’s the tough medicine the economy needs right now. For everyday Australians, this means the cost of living crisis is likely to drag on for a while yet.