How does the concept of "monetizing the debt" lead to inflation, and why is it risky for developing countries like the Philippines?
Answer (1)
Monetizing the debt happens when a government borrows money to cover its expenses and the central bank prints more money to finance that debt. In the short term, this makes it easier for the government to spend without raising taxes or borrowing from the public. But in the long run, it can cause serious problems—especially high inflation or even hyperinflation.When more money is printed without an increase in goods and services in the economy, the value of money drops. This is a basic rule in economics: too much money chasing too few goods leads to price increases. If a government keeps doing this, it risks creating runaway inflation, where prices go up quickly and money loses its worth.For example, in countries like Zimbabwe and Venezuela, governments printed massive amounts of money to cover debt and pay salaries. The result? A loaf of bread that cost ₱10 last month could cost ₱100 or ₱1,000 next month. People had to carry bags of cash just to buy food. The local currency became so worthless that people started using U.S. dollars or bartering instead.For a developing country like the Philippines, monetizing debt is risky. While the government can issue bonds or borrow from international lenders, depending too much on the central bank to fund spending could lead to inflation. And inflation in the Philippines hurts the poor the most because they spend most of their income on basic needs like food, water, and transportation.Also, if international investors see that a country is printing money to pay its debt, they lose confidence. This could weaken the peso, increase borrowing costs, and reduce foreign investment.In summary, while monetizing debt might seem like an easy fix, it creates inflation, reduces trust in the currency, and puts long-term economic stability at risk. That’s why responsible debt management and careful government budgeting are important for countries like the Philippines.
