"Printing Money" - a viable solution for economic growth?

Yesterday, I was talking to my husband about my dream home with big beautiful quartz island, a large custom closet, an elegant fireplace and other never-ending list of wishes. He sarcastically laughs out loud and tells me that we need a “money printing machine” to make my dreams come true. “Printing money” - that word caught my attention and we begin a new conversation about it from economic point of view. Both of us had different perspectives (obviously! 😉) on how it will affect economic growth of a nation and so we ended the argument without any conclusion. Still curious, I did my research and here are my conclusions.

According to me printing money could probably be a feasible solution for economic growth of a nation if done correctly. Of course, they are many challenges associated with it but, before we talk about challenges, we should first start from the enormous debt that our economy is facing today and how can printing money can be helpful. United States has enormous debt of $22.6 trillion as of today. For decades, credit cards have made it possible for Americans to live their lives beyond ordinary limits. Banks lent large sums of money to homeowners and persuaded them by saying, the prices of real estate can only go up. Government kept spending as it assumed foreigners could always be relied to finance American debt. Unfortunately, during 2008 financial crisis consumers tapped out and asset values depressed, the banking system went in crisis. Interest rates are near zero, but households and firms are too worried to spend and go further into debt. This explains how the country got into such economic trouble. With all this happening, billions of dollars on projects are being planned such as building roads etc., to put people back to work. Starting December 2008, Federal Reserve made a decision to drop interest rates close to zero, which means that banks can basically borrow money for free while lending straight to financial institutions. But where does all this money come from? Also, how can a country that got itself in debt by borrowing and spending, now borrow and spend its way back to safety?

Oh wait, US is not alone! This is the situation of many economies across the globe. For this discussion, let us divide the total debt of a country into three categories: 

1.      Tax payer’s debt

2.      Financial sector/ bank’s debt &

3.     Government’s debt 

The telegraph post published in 2009 outlines some measures to control these debts. They are:

a)    Liquidity Support 

This proposal will help with financial sector/bank debt listed above. Central bank lends out money in return for collateral.

 Pros: Central bank does not interfere directly with monetary policy and ensures that a financial bank’s balance sheets are saved. 

Cons: Although it addresses liquidity problems, it doesn’t stop the financial bank from being in the same situation down the line. This is a short-term fix which helps ease some strain on the financial markets. Governments should enforce financial regulations which will help in this kind of situations in future.

b)    Buying Corporate Debt 

Central Bank buys the assets of private investors. The assets are most likely short-term company debt and corporate bonds. It pays for the money by issuing government bonds without increasing the amount of cash in the system. This is what the Federal Reserve did in US during 2008 financial crisis. 

Pros: If implemented properly with strict regulation, this method will help in reducing cost of credit for financial market and provides more capital. This method doesn’t cause inflation as the capital is provided by the government. 

Cons: It’s difficult for central bank to find right type of debt (which won’t default). 

c)    Buying Government Debt 

Central bank buys back government debt from investors and banks rather than corporate debt. Bank of Japan have tried it in the past.  

Pros: This helps the government to save on future interest payouts and brings down long term interest rates. 

Cons:  It does not make difference to companies cost of borrowing. There might be long terms benefits of doing this but needs a lot of oversight and control on government spending, which is politically improbable to achieve. 

d)   Printing money 

Central bank “prints” more money with the intention of increasing economic growth. We will explore different ways of executing this concept with pros/cons by giving examples of different countries. First three options, aim at fixing financial sector and/or government debt. Keep in mind that none of these options solve all the three types of debts. In my opinion, however, printing money when implemented correctly, it may help in creating a debt free economy. In the United States, we have two monetary authorities that can regulate or alter the money supply (Hans F.Sennholz, 1969): 

·          U.S. Treasury &

·           The Federal Reserve System 

 US Treasury controls taxes, interest rates, government accounts, etc. while, Federal Reserve has the right to supervise and regulate banking operations and conduct monetary policy which includes printing money. Since printing money to finance public deficits is an unconventional method, many economists shy away from this idea, but there are few like economists Milton Friedman, Ben Bernanke, Adair Turner, etc. that support this idea. Government could, for instance, pay a certain fixed amount to all tax payers by electronic transfer to their bank accounts. People will then be able to spend the money on either food, household goods, vacations etc., this will create demand across the economy. The extent of that stimulus would be broadly proportional to the value of new money created.

Recently, Bank of England electronically printed money to pour into Britain's financial institutions which was named Term Funding Scheme (TFS). This scheme was established to encourage banks to lend more cash to consumers and to pass on lower interest rates to households. In order to regulate banks from hiking interest rates on mortgages, BoE promised to lend those banks money if they lent it on to their customers at similar rate. BoE was able to lend money to banks by printing it. Although, it is slightly similar to Quantitative Easing (QE), where bank increases money supply by introducing capital into financial market, there are subtle differences one of which includes not printing bank notes in QE. TFS enabled sharp increase in size of the Bank's balance sheet. QE increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero. Instead of purchasing government securities or other securities from the market, it can be combined with printing money which will raise asset prices, driving down market interest rates, and stimulate spending. 

In Britain, Jeremy Corbyn, the leader of Labor Party, suggested the Bank of England could pay for some infrastructure by printing money, that way, the government doesn’t have to fall back in debt for its spending. Whether channeled through a public bank or invested directly, the funds could be given at no or very low interest, allowing infrastructure projects without an increase in taxes, tolls and other fees. This might not sound so radical, but it is not impossible to achieve. Former president, Abraham Lincoln printed $450 million (almost $11 billion in today's dollars) to help pay for the Civil War, and even Milton Friedman proposed “helicopter money” which is a metaphor for “dropping” newly printed money directly into communities to combat deflation. In my next post, we will discuss some challenges associated with printing money and recommendations that might fix them.