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Printing Money - Challenges & Recommendations


Last week, I wrote about how printing money can be a viable solution to boost economic growth of a nation. If implemented properly, it can help in eliminating the debt of a nation. However, it comes with its own set of challenges. I will also discuss about addressing these challenges. 

Challenge 1 – Excessive printing of money

We all know that excessive printing of money can cause an alarming inflation. This was faced in countries of Zimbabwe, Germany and Weimar.

Recommendation - Money financing should be used sparingly, and for specific situations such as to pull an economy out of a lengthy slump or to write off excessive public debts. If we accept money finance as a normal operation there is a danger that future governments will abuse it greatly.  

Challenge 2 - “Printed money takes the form of credit which mostly goes to investors or the government” (Osama Diab,2017)

The first beneficiaries of the printed money are financial institutions, who have access to new cheap money. The advantage an early recipient of new money has is that they have the money before prices have adjusted to the injection of the new cash. Hence, they can issue loans at current market rate which is higher than the rate at which they received money.

Recommendation- Regulate the distribution of printed money. Government should impose strict regulations on financial institutions, to ensure that they are lending the printed money to end customers at similar rate they received. 

Challenge 3 - Savings will be affected 

Extremely low interest rates caused by pumping printed money into the markets also means that savers and pension funds get tiny returns. This is not encouraging and may deplete personal or retirement savings among public. (Ed Conway, 2017)


Recommendation- The central banks should introduce printed money into markets slowly giving it time to adjust to new situations. Given the positive effects that can be created through money printing, this may not be a major disadvantage as the interest rates may rise after sufficient growth is achieved.

Conclusion

The key point of money printing is that the government would be boosting economic growth without having to borrow or create new debt. Printing money, of course, has other risks like inflation. But we must remember that there are two instances where this didn’t happen.
  1. During the U.S. Civil War, the Union government printed money to pay for its military without any serious consequences. 
  2. And in Japan, during the 1930s, its central bank financed the deficit spending to pull the country out of recession by printing money. 

Although this is an unconventional method, when all other options fade out, regulated printing of money can help in economic growth. Some central banks are already exploiting their legal right to print money. Since, we know its advantages and drawbacks well, depending on situation of the economy it may be sometimes wise to stick to its standard solution of borrowing.


For countries like US, where the problems of debt, slow growth, and the high toll of prolonged economic stagnation are dominant, we are looking at choice of dangers. We could return to another round of debt issuance or we could choose the unconventional alternative--------- printing money!







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