What makes this time different? In the past, the United States has run significant deficits. And we fared considerably better than many predicted during the 2008 financial crisis.
“In the 2008 Financial Crisis, there were specific villains; take your pick: Lehman Brothers, AIG, Countrywide, Goldman Sachs, and so on.” There was a run on liquidity in financial markets around the world in mid-March 2020. Yes, most American businesses were heavily reliant on debt at the time. However, to market outsiders, the financial markets appeared to be operating normally. Despite this, there were no (obvious) villains in the March liquidity run.
“In mid-March, the unprecedented demand for market liquidity in the United States manifested itself primarily in non-government sales of US Treasury securities” (treasuries). The Federal Reserve (the Fed) quickly realized that its Primary Dealer banks (major worldwide banks) lacked the balance sheet capacity to quickly buy (and subsequently sell to others) these assets; the Fed needed to become the primary buyer of treasuries right away. If the Fed had not done so, the price of Treasury bonds would have fallen sharply, and their yield or interest rate would have increased just as sharply; this would have put upward pressure on the government’s borrowing costs…and likely inflation and higher interest rates for everyone.
“Shortly after, the Fed began buying treasuries on a scale never seen before, and it soon became a buyer of all treasuries its banks wanted to sell. The Fed’s balance sheet assets increased fast as a result of these sales, as did the banks’ “excess reserve” liabilities. When seen from the standpoint of the Fed’s individual banks, these “excess reserves” became their new assets at the same time as their sold treasuries.
“Shortly after that, the Fed began buying any and all additional assets that its banks wanted to sell, at values that were similar to those seen before the liquidity crisis in mid-March, allowing banks to avoid suffering losses.” Meanwhile, because the Fed is the Fed, it didn’t have to account for the assets it bought as losses.
“In short, the Fed’s “excess reserves” were converted into fresh and high-quality bank assets. The Fed is “creating money” at a rate that has never been seen before; in truth, the banks are doing the majority of the printing.
“This process repeats itself; each time it does, banks are able to purchase the undesirable assets of other market participants, backed by their “excess reserves” with the Fed, utilizing their money creation powers. In turn, the Fed buys these assets in exchange for giving its banks with more “excess reserves.”
“The Fed’s efforts have had the effect of keeping interest rates lower than they would have been otherwise, benefiting all borrowers, including the government.”
“A aspect of the Fed’s asset purchases by “printing money” is that it has primarily benefited Wall Street firms and their huge corporate clients. The Fed has also contributed to programs that directly benefit Main Street, though not in the same way or to the same extent as its Wall Street programs. This technique has had the overall consequence of increasing societal inequalities in the United States, as well as exposing the typical American to future inflation concerns.
“With the Covid-19 pandemic expected to last longer than expected and the economy showing few indications of improvement, the Fed’s initiatives are likely to continue.” There isn’t much else the Fed can do given that interest rates are so close to zero. The Federal Reserve’s balance sheet will continue to expand, potentially reaching tens of trillions of dollars. Financial asset values are likely to rise further, notably in the equities market, provided the economy remains stable and technological businesses, led by FAANG (Facebook, Apple, Amazon, Netflix, Alphabet/Google), continue to support it.
“However, we are on the verge of colliding with another force, as we observe an increase in Main Street insolvencies, unemployment, and the deterioration of regular individuals’ and businesses’ finances. We might witness major deflation if the Fed eases off on “printing money,” like Japan did in the 1990s. Worse, we may witness dramatic increases in inflation. Remember President Jimmy Carter? This would result in the secular stagflation that former Treasury Secretary Larry Summers predicted.
Why can the United States comfortably “print money,” but other countries (necessarily) cannot?
“The quick answer is that the United States dollar serves as the world’s reserve currency. To put it another way, most governments and enterprises from other countries need to transact business in US dollars, putting them at risk of their currency depreciating against the US dollar. The United States, and specifically the Federal Reserve, is not exposed to this “currency risk.”
“Some argue that the United States is at risk from other countries, particularly China, refusing to buy Treasury bonds or aggressively dumping the bonds they already own. The Fed could, at least in the short-medium term, immediately purchase all of the government’s treasuries. The banking industry would contract in the worst-case scenario.
“However, the United States should be able to fund itself for an indefinite period of time.” If all other factors remain constant, the dollar’s role as the world’s reserve currency is likely to deteriorate. However, the United States’ worldwide position does not have to deteriorate in comparison to the majority of other countries. All of this may be an acceptable gamble for the US to take if China were not a variable in the equation; nevertheless, China is a variable in the equation.”
How might China’s new monetary policy endanger the United States’ current approach?
“The novel idea of every citizen and business in a country having a bank account with its central bank (the equivalent of the Fed) rather than a commercial bank underpins the central bank digital currency (CBDC)-based new monetary policy.” Interest rates on these accounts’ balances could be positive, zero, or negative. Entities would be able to electronically deal with others through such an account, often using mobile phones, Paypal, WeChat Pay, credit or debit cards effectively, a government-backed version of bitcoin. The government might accept both credit and debit payments, such as money that its central bank just “prints.”
“Monetary policy based on such an account system would allow a government to avoid issuing bonds to create debt and then spending the bond proceeds, as they do now.”
Any government would simply “print money” and use it to purchase the goods and services it requires, as well as to pay individuals and businesses. All of the operations detailed above by the US Federal Reserve become obsolete in such a world.
“A distinguishing feature of CBDC-based new monetary policy is that the money it “prints” is no longer “fungible,” which means that one US dollar or Euro isn’t always equivalent to another.
Rather, particular restrictions can be electronically appended to every unit of CBDC-type money created by a country. These rules may include things like how quickly the money must be spent, what items and services it can be spent on, and with whom it can be spent.
“CBDC-based monetary policy would be diametrically opposed to existing monetary policy, in which the Fed’s status as “reserve currency” empowers it to accomplish everything we just detailed.
Inflation is, of course, a risk that any government faces when it “prints money.” However, a government could counteract this by limiting the number of CBDC units available or limiting their use. In the same way, if a government is concerned about deflation, it might raise the number of CBDC units available or limit the amount of time these units must be spent.
“If China, Japan, and/or the Eurozone implement a CBDC-based monetary policy, it might diminish their exposure to the dollar and weaken its distinctive role as the global reserve currency.” And, as the dominating even monopolistic actor, the United States may be reluctant to respond to the “attacker’s advantage.” Ironically, hundreds of existing US patents, many of which are owned by inventors/assignees who are not US businesses, may confine the US.”
With the hope that our dependable guidance has brought you this far, one must wonder: how real is this threat? Consider the following:
13th of October, 2020: China’s central bank and the local government of Shenzhen’s southern tech hub have finished handing out “digital yuan red packets” totaling RMB 10 million (USD 1.49 million) in what is viewed as the country’s official digital currency’s first public test, according to Xinhua.
In the most basic terms, as Modern Monetary Theory academics claim, the Fed may be able to “create money” indefinitely. Of course, unless China can show it has the technological know-how, political will, and economic muscle to challenge the dollar’s status as the world’s reserve currency.
Is it possible to print money without causing inflation?
Question from a reader: Could you kindly explain how we can have no or low inflation if the government injects two or three trillion dollars into the US economy and output falls?
This is a fascinating query. In some cases, though, printing money without producing inflation is possible.
In short, even though the money supply increases during a slump, firms and consumers do not go out and spend it. They keep it, pay off debts with it, and utilize it to compensate for a drop in income. As a result, even if the money supply has increased, the amount of money flowing in the economy has decreased.
What matters is not how much money you have (for example, how many $10 bills you have), but how often you utilize it.
In normal times, giving each citizen $1,000 would encourage them to spend it on greater luxury, which could lead to inflation. In this case, however, giving households $1,000 would not result in a rise in demand – many households would lose considerably more than $1,000. Other homes with a strong income are likely to put money aside for the time being.
The Central Bank will frequently print more money and buy bonds from private banks as part of quantitative easing. But, what will commercial banks do with all of this extra cash?
They won’t lend it to businesses or individuals. At the present, no one wants to invest or spend. They will just increase their cash reserves, implying that despite the fact that there is more money in the economy, economic activity is still declining.
Why can’t the United States simply print more money?
Let me try to clear up some of the misunderstanding. Imagine the economy’s only good is corn, which costs $1 per pound, and you and everyone else earns $100 per month. You buy 100 pounds of corn each month, trading $1 for 1 pound of maize, hence the real value of $1 is 1 pound of corn. Now imagine that the government just creates more dollar bills and gives you (and everyone else) an extra $100. If you want to eat more than 100 pounds of maize each month, you can now do so; however, because others want to do the same, corn demand in the economy will undoubtedly rise, as will its price. You’d have to give up $1.50 for each pound of grain now. This is inflation, and it’s diminishing the real worth of your dollars you’re receiving less corn for your dollar than you were before.
You might wonder if businesses will hurry to accommodate the increased demand created by everyone having an extra $100. Yes, but they’d have to hire people to work on the farms, and the increased demand for labor would very certainly raise their pay. Workers will also notice the inflation around them and want higher dollar earnings so they can buy the same amount of corn as previously. In other words, actual wages would rise, eroding profits, and farms would not hire as many people as you might imagine. So, yes, printing money can have a short-term stimulative effect.
In the end, no government can print money to get out of a slump or recession. The deeper reason for this is that money is essentially a facilitator of human interaction, a trade middleman. We wouldn’t need money if goods could trade directly with one another without the necessity for an intermediary. Printing more money has only one effect: it changes the conditions of trade between money and things. Nothing basic or true has changed; what used to cost $1 now costs $10. It’s as if someone inserted a zero to every dollar bill overnight; this, in and of itself, makes no difference. Giving every student ten more points on an exam has the same result.
Will printing money in the United States lead to inflation?
Readers’ Question: What causes inflation when money is printed? Is this something that always happens?
Inflation will occur if the Money Supply grows faster than real output, assuming all other factors remain constant.
The amount of commodities produced does not alter if additional money is printed. Households, on the other hand, will have more cash and money to spend on things if money is printed. Firms will simply raise prices if there is more money chasing the same number of goods.
With the formula MV=PY, the Quantity Theory of Money attempts to establish this link. Where
If we assume that V and Y are constant in the short run, increasing the money supply will result in an increase in price level.
Simple example to explain why printing money causes inflation
As a result, the average cost of the output will be $10 (10,000/1000).
Assume the government prints an additional $5,000 note, resulting in a total money supply of $15,000, but the economy’s output remains at 1,000 units. People have more money, yet the number of products they have is the same. People are willing to spend more because they have more money to spend on things in the economy.
In all other cases, the price of 1,000 pieces will rise to $15 (15,000/1000). The price has risen, but the quantity of output has remained unchanged. People are not better off, and money has lost its value; for example, a $10 bill now buys less things than it did earlier.
As a result, if the money supply is doubled but output remains unchanged, everything becomes more expensive. The rise in national income will be entirely monetary in nature (nominal)
If output rises by 5% but the money supply rises by 7%, The inflation rate will then be around 2%.
Printing money and devaluation
If a country prints money and inflates, the currency will devalue against other currencies, ceteris paribus.
For example, hyperinflation in Germany from 1922 to 1923 caused the German D-Mark to depreciate versus non-inflationary currencies.
Because the German currency buys fewer things, you’ll need more German D-Marks to buy the same amount of US goods.
Examples of inflation caused by excess supply of money
The Confederacy of the United States of America existed from 1861 until 1864. The Confederacy printed more paper money during the Civil War. They created $20 million notes in May 1861. The total amount of notes created had risen to $1 billion by the end of 1864. By April 1864, the rate of inflation had risen to 700 percent. People lost faith in the money, and by the end of the Civil War, the inflation rate had risen to over 5,000 percent.
1922-1923 in Germany. One dollar was worth 90 Marks in 1921. The US dollar was worth 4,210,500,000,000 German marks by November 1923, demonstrating hyperinflation and the depreciation of the German currency.
Link between money supply and inflation in the real world
The analysis presented above is oversimplified. In the actual world, it is difficult to measure the money supply, for example (there are many different measures from M0 narrow money to M4 wide money) In addition, different printing money may not produce inflation in a liquidity trap (recession). (For further information, see Why Printing Money Doesn’t Always Cause Inflation.)
This does, however, provide a rough explanation for why printing money diminishes the value of money, causing prices to rise.
Is it true that printing money causes inflation?
I frequently hear the suggestion that we should simply print more money. Faced with rising inflation and dwindling commodities, printing money appears to be a magical solution for making everyone affluent and eradicating poverty. Isn’t it true that if everyone had more money, they’d all be more prosperous?
In reality, creating money goes against the fundamental laws of economics. The concept of supply and demand is central to economics. There would be an artificial oversupply of demand money if we created more money, but the supply of commodities would not expand at the same rate.
As a result, hazardous inflation emerges. Prices would rise to the point where the newly acquired funds would be useless.
To deal with their financial problems following World War I, Germany’s Weimar Republic produced absurd sums of money. The German mark, their currency, had depreciated to the point where people would use it to buy wallpaper and firewood since it was cheaper than those items. In 1918, a loaf of bread cost half a mark, but by 1923, the price had risen to 200 million marks.
More people had money to spend, but there was a finite amount of supply, thus prices rose. The newly produced money they discovered had lost its value, making it impossible for everyone to purchase items.
The results are obvious: printing money drives up prices and reduces people’s purchasing power and savings.
Even now, with petrol prices and other everyday things at all-time highs, printing money and distributing it to people would increase the quantity of money while also increasing prices. Money would be rendered useless.
People do not become affluent by accident. The dollar is nothing more than a piece of paper. It does not have a precious metal backing, such as gold or silver.
The assumption that a well-established country, such as the United States, may print money or take on excessive amounts of debt to operate the government, according to Investopedia, is a novel theory in economics.
Congresswoman Alexandria Ocasio-Cortez, a Boston University economics graduate, appeared to favor MMT when she suggested the US should “break the false concept that taxes pay for 100 percent of government expenditure” by supporting deficit spending instead.
The United States appears to have turned to MMT in the face of a national debt of about $29 trillion. Our country will never be able to repay that debt. The United States’ spending binge began in the twentieth century with Woodrow Wilson and continued with Donald Trump, and President Biden will continue the pattern.
The financial policies of the United States have been inept, and printing money is one way they have demonstrated their ineptitude. Despite politicians’ best efforts, creating an economic utopia in which everyone has money is useless and, as a utopia should be, unattainable.
Poverty is impossible to eradicate. People with more purchasing power than others will always exist. Printing money will not close the gap since the economic repercussions of printing money are increased costs and inflation, not an increase for financially secure people.
Money does not grow on trees, as the old adage goes. The United States of America engages in risky financial practices. It’s a risky thing to ask, “Why don’t we just print more money?”
Why isn’t the government able to print additional money?
Nirmala Sitharaman, the Finance Minister, said on Monday that the government has no intentions to create money to address the current economic crisis brought on by the coronavirus outbreak. We go over the regulations that govern money printing and why the government can or cannot do it at will.
Nashik’s Currency Note Press produces banknotes for the Indian government. The Reserve Bank of India is consulted before printing banknotes of a specific denomination (RBI).
When governments borrow or print additional money to enhance liquidity in the economy, this is known as deficit financing. The government might invest and spend the newly acquired funds to help the economy recover. This can be accomplished by, for example, constructing infrastructure, which in turn produces work for a large number of people. Direct cash transfers to the impoverished, who will subsequently spend it, are another option.
Why can’t a country make money by printing money?
To become wealthier, a country must produce and sell more goods and services. This allows more money to be printed safely, allowing customers to purchase those extra items. When a country issues more money without producing more goods, prices rise.
Why can’t we simply print money to pay off our debts?
To begin with, the federal government does not generate money; the Federal Reserve, the nation’s central bank, is in charge of that.
The Federal Reserve attempts to affect the money supply in the economy in order to encourage noninflationary growth. Printing money to pay off the debt would exacerbate inflation unless economic activity increased in proportion to the amount of money issued. This would be “too much money chasing too few goods,” as the adage goes.
Is it possible for a country to print as much money as it wants?
Money can be thought of as a record that is acknowledged as payment or recompense for any services or products. Money supplies a country with a socioeconomic foundation.
The central bank has not established any predefined values or patterns to limit the amount of currency that can be printed. The requirement is that it should be sufficient to perform services, move commodities, and restore currency value. The value of a currency is determined by a variety of factors, including the associated interest rate, average exports, current, fiscal deficit, and many more.
Typically, the Central Bank issues about 23% of the overall Gross Domestic Product. This percentage varies depending on the economics of the country. More than 23% of total GDP is printed in developing countries. Money circulation is also influenced by the amount of black money in circulation, which has an impact on money availability in legitimate channels.
A country can issue as much money as it wants, but each note must have a different value, which is referred to as denomination. If a country decides to produce more currency than is required, all manufacturers and dealers will request additional funds. If the production of currency is multiplied by a factor of 100, the price will grow as well.
The value of products and services should be perfectly balanced while printing money. That is why, when a country’s economy is doing well, it may produce more currency or money.
A large portion of the population in emerging countries is rising out of poverty. As a result, the government should supply enough currency to its citizens to meet their demands. This is known as incremental money supply, and it should be proportional to the real output of the country’s economy.
Inflation results from an excess of money supply, which reduces purchasing power. Demand and supply are normally in proportion in industrialized countries, which is why commodities and services are in balance.
More currency should not be produced in the quest to make a country totally accomplished and wealthy. Because, rather than aiding the economy, this might lead to inflation.