Richard Gilbert's article "Why not print money?" in the Globe's Economy Lab toys with more radical monetary intervention as a response to the crisis. Desperate times, they say, call for desperate measures. The title (which was perhaps not Gilbert's at all) is more provocative than the article itself, which is mostly about tolerating higher inflation that could have beneficial impacts for easing our way through the current crisis.
Higher inflation would amount to a transfer of income from savers to borrowers, and from richer to poorer, so already I like it. What fascinates me is how this could be done. Turns out Gilbert is channelling arguments from Kenneth Rogoff back at the height of the financial crisis in December 2008:
Fortunately, creating inflation is not rocket science. All central banks need to do is to keep printing money to buy up government debt. The main risk is that inflation could overshoot, landing at 20% or 30% instead of 5-6%. Indeed, fear of overshooting paralysed the Bank of Japan for a decade. But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.
It will take every tool in the box to fix today's once-in-a-century financial crisis. Fear of inflation, when viewed in the context of a possible global depression, is like worrying about getting the measles when one is in danger of getting the plague.
A couple years later, the U.S. quantitative easing program has essentially done the bit about creating new money by buying up government debt, mostly from the perspective of keeping down longer-term interest rates, rather than boosting inflation (on which the Fed maintains a hawkish tone). The idea behind QE2, the last round of Fed quantitative easing, was to force liquidity into the economy, which would induce more spending on actual goods and services that boost the economy. But it is not clear that the program has had much impact (though it is possible things would have been worse had they not engaged QE2). The people who need money in their pockets are not the ones holding government bond portfolios, so the program seemed mismatched from the outset.
Moreover, I'd dispute the underlying monetarist theory of inflation that more money leads to inflation per se. Greatly increased demand for goods and services relative to the productive capacity of the economy would lead to inflation. A supply shock (think oil prices) would lead to inflation. But encouraging a swap from holding government bonds to holding cash does not necessarily drive up demand (and thus inflation) for conventional goods and services (though it might drive up the prices of other assets, like gold or stocks, upon which people hold their wealth).
Now that QE3 is on the horizon, something more direct -- like actually increasing demand via fiscal stimulus -- would seem a better way to go. There are unemployed people and under-used resources in the economy. Governments can create jobs while investing in needed infrastructure (mass transit, efficient buildings, green manufacturing, renewable energy, early learning, etc). Also at the height of the crisis, I recall David Laidler calling for the Bank of Canada to finance federal deficit spending:
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Well designed, [fiscal stimulus] can have immediate and beneficial effects on the sectors toward which it is directed; but more important for monetary policy, it must be financed by the sale of government bonds. If those bonds' initial purchasers are in the financial system, or among the public at large, the Bank of Canada can then actively buy them up, as part of its efforts to force liquidity into the economy; a few intermediate transactions could be eliminated, while achieving the same ultimate result, were the central bank itself to be the bonds' initial purchaser.
These recommendations will horrify anyone who believes that fiscal deficits financed by money creation are an inflationary route to ruin. So they are when the real economy is running near its capacity and financial markets are functioning normally. But when the real economy is depressed, and when deadlocked financial markets seem to be functioning normally, but in fact are providing insufficient stimulus to support a real recovery, those same policies will encourage the spending needed to restore normality.
There is nothing stopping the U.S. Fed from doing the same. The big barrier is psychological: once we start talking about "printing money" the danger is that millions of misunderstandings about what money is get amplified. In a fiat money system like ours it is the faith or belief that a colourful piece of paper has a certain value in purchasing goods and services that matters, and we need to be careful in shaking that confidence. That most people seek to get money (by selling their labour, or making investments, or buying low and selling high) to acquire things now or in the future is pretty obvious.
But how the money supply itself grows through the expansion of credit in the banking system is not broadly understood. The scale of private money creation is huge. Bank of Canada data for a number of monetary aggregates show that money expands rapidly during boom times, and slows down during downturns. Going back to 1996, M1+ has been at lows of about 4% annual growth, while peaking at more than 14% annual growth. M1++ peaked at around 20% annual growth through much of 2009. A broader monetary aggregate, M2++, did not grow as fast as that, but still was in the 8-9% annual growth range between late 2006 and late 2009. All of this money supply growth was compatible with low and stable inflation.
Then think about the size of these monetary aggregates. Measures in the BoC's Banking and Financial Statistics publication (Section E) show the size of the money supply based on a number of different measures: M1++ grew from $559.8 billion at the end of 2007 to $633.4 billion a year later, and $751 billion at the end of 2009. That is growth of almost $200 billion in two years, an amount that is close to the size of the federal budget. The bigger aggregate, M2++, grew from $1.62 trillion at the end of 2007 to $1.88 trillion at the end of 2009, that is, by about $260 billion.
So financing a $50 billion deficit through the Bank of Canada at a time when demand and private credit creation are slow is not a really big deal -- apart from fear that would be whooped up in the media by those who do not get this or whose economic interests were adversely affected. Even a modest uptick in inflation is likely to bring hysterical cries from those who own the debts that must be repaid. And higher but stable inflation can get locked in to price and wage expectations that impose some economic costs on society, although costs will be minor for inflation rates in single digits.
The biggest scare tactic is the image of wheelbarrows piled high with rapidly devaluing cash in inter-war Germany. The fear of change leading to hyperinflation could play a big role psychologically, even though modern circumstances are not analogous: it is not the 1930s and we are not a defeated nation forced to pay preposterous reparations payments to the victors. The subsequent German economic "miracle," it should be noted, stemmed from big deficits used for massive public works and military ramp-up that dropped unemployment very quickly. That's an aside from the broader horrors of Nazi Germany, but it is interesting that inflation was nowhere to be found.
Thanks to Richard Gilbert for getting me to dump all this out. He and Rogoff are right about tolerating modest inflation, wrong about the theory of inflation, but breaking out of the stagnation-come-double-digit-recession merits rethinking how we integrate monetary policy and fiscal policy in a way that creates jobs and supports the transition to a low-carbon economy by putting resources to work. And given that there are horribly polluting industries out there that need to be phased out, why not use public money to offset the economic hit of decommissioning? At a time of deleveraging and record high household debt, a new public sector stimulus program is just what is needed, rather than the conventional wisdom that nothing more can be done by governments.
This article was first posted on The Progressive Economics Forum.
Believe it or not, this is not quite the dumbest thing Marc Lee has ever written.
i like your analysis but i suggest you've missed at least one factor: interest. causing inflation will increase borrowing which causes interest rates to go up. if you are a rich person who takes out savings because things cost more, then more money starts circulating (good for the economy). the rest of the public will have to consider borrowing to handle some increased costs. most of the weight put on banks for borrowing will however come from the commercial sector that needs to increase its cash flow to cover the costs of its now more expensive inventory and will have to wait for the buyers to come and pay--this inbetween time is the 'float' of a business, the time from created payables to resolved receivables that are turned around to the payables. all this increases borrowing costs i.e. interest. generally not considered good or pleasing to most and we are a world addicted to low interest.
any of the few with nmoney to save will be happier, but besides that, the solution of printing more pieces of paper with which to trade will not curb high interest or high inflation. if we are seriously considering a hyperinflation scenario as i understand you are suggesting, more dollar bills will cause additional inflation. despite the imaginary value of money and its psychological effects, it is still a physical asset that suffers from the weakening of value when the supply increases. business will need more dollars or their meta-counterparts of numbers/credti/cash balances to cover their expenses and then sales prices increase again.
hyperinflation, or even growing inflation that is not checked, thus leads to more inflation--of prices and interest. what usually checks inflation is that those rich and poor people buying things tend to back off when they see it, so after an increase in business buying, maybe even employment increases, the process slacks off, jobs drop and a certain number of entities close shop. that last sentence probably didn't need explaining but i do have strong doubts that our economy is going to behave typically or necessarily be "functioning normally" because the past 3+ years have revealed a lot of anomalies in that regard showing that theory is great but its not real.
somebody told me all the gold in fort knox would cover the u.s. debt for about 4 months and that raising the debt ceiling is only a solution for as long as it takes the u.s. public to favour republicans again. that leaves out pegging the dollar to gold as a solution to stabilizing it. somebody else told me biz taxes in the u.s. were nearly 30%--good thing they didn't raise them. let them print money, let them eat cake. but gaining weight takes less time than losing it does, and people, psychological rats that they are, take more time getting over fear than getting over happiness.
Why not print money? 1. There can not be freedom or democracy with fiat money. Governments throughout the world have shown they cannot be trusted to keep low inflation rates, and at 3-6% the wage earners are unable to save money, as it loses its value every day of the year. It's a Pnnzi scheme.
2.Transfer of money from savers to borrowers, soon there would be no savers, just hoarding of goods to survive old age.
3. Marc as a 'columnist' what economic system do you want. The choice today is fascict, socialist, monetarist, Keynesianism and Austrian. Mine is the last. If you do not have a choice I think you should stop writing, and Barack Obama should stop talking; doing the world a great favour. You could of course get an understanding of each system and then perhaps make more sense. Philipc
The entire economy is insane. As long as we have money as a scarce commodity, we will have class structure, poverty and war. If we switch to a plentiful money system, like the LETSystem expanded, we would move the decision making process into the real economy instead of the artificial economy It would essentially democratise the economy and eliminate poverty at the same time.
dear philipc @ 1:54am
in your list of available fiscal options for society you missed social credit.
i say bring back social credit and the A+B theorum.
now.
yours sincrely
alfred venison
Marc. One more thing, it's not public money it's taxpayers money; government, the state produces nothing, has no money except what it forcibly expropriates from the taxpayers. Philipc
In response to phillipc: like private sector companies, the government provides services (or even supplies goods) to the people, which pay for these services through taxes. Would you please explain then how a private company providing a service is 'productive' while a government agency providing a service is not?
Take health care, for example. If the government provides public health care, it is producing a service, we are paying for it, having health care available to us provides us with benefits, and jobs are created with salaries that allow people to buy other goods and services from businesses. Yet by your logic, nothing of any value is produced by the public health care system. Are you saying that if Medicare were privatised tomorrow that it would magically become 'productive'? And if so, what on Earth do you mean by 'produce'?
Another thing, Philipc:
The following statements are untrue, or dubious:
"There can not be freedom or democracy with fiat money." - In that case there has never been freedom or democracy in modern times, since by definition any national currency is fiat money, in that it is the state that legalizes and regulates any such currency. Even having a currency on the gold standard doesn't make it any less 'fiat', since what is on the gold standard today can be taken off it tommorrow (with no clear effect on freedom or democracy as I understand them)
"Governments throughout the world have shown they cannot be trusted to keep low inflation rates, and at 3-6% the wage earners are unable to save money, as it loses its value every day of the year. It's a Pnnzi scheme." - This is assuming that wage increases are kept below the inflation rate.
"Transfer of money from savers to borrowers, soon there would be no savers, just hoarding of goods to survive old age." - Was there no saving in the 1970's, when the inflation was usually higher than 6%? Remember, even an interest rate below the rate of inflation provides a better rate of return than money kept under the mattress.
"[...] what economic system do you want. The choice today is fascict, socialist, monetarist, Keynesianism and Austrian." - What are you basing this claim on? What does this claim even mean? For one thing, the meaning of all those words (from 'fascist' to 'Austrian') is disputed. Also, any short-term fix for our economic ills has to deal with the system we already have (which one do you think we have, by the way?)
This is assuming that wage increases are kept below the inflation rate.
Sounds like a safe assumption to me.
"Transfer of money from savers to borrowers, soon there would be no savers, just hoarding of goods to survive old age." - Was there no saving in the 1970's, when the inflation was usually higher than 6%? Remember, even an interest rate below the rate of inflation provides a better rate of return than money kept under the mattress.
A better rate of return for the savers (who are lending the money). But Marc Lee was saying wealth would be transferred from the savers to the borrowers, who would, ex hypothesi, be borrowing at interest rates below inflation. Keeping money under the mattress is not an option for borrowers, as by definition they don't have spare cash lying around.
So, on the dubious assumption that Lee is correct about this wealth transfer, it would make more sense for savers to become hoarders of commodities rather than to save money (or lend it out at sub-inflation rates) and watch it evaporate through high inflation. philipc was correct to point this out.
We used to have money nased on gold, when I was young. Then they went off the gold standard and that created fiat money. It has no value because it can no longer be converted into something of value. The value of fiat money is only in our heads. It does not mean, the money someone might save up for her little Italian sports car.(;-))
Gold was $32 per ounce when it was the basis for the currency. The basic idea in freeing up the value of gold and mney is that now governments could print more, (issue more), and the wealthy could make more profits faster. They've certainly done that. The economy is going so fast now that the rich have just about all the money. What kind of an economy is it that rewards psychopathy and punishes the workers with poverty.
Money: A tool used by the rich to convince the poor that they have no power.
Nonsense. You can still buy gold or a million other valuable commodities with "fiat" money.
The exchange-value of money is determined by the market, just like the value of every other commodity in the world, including gold. Those values are all equally ephemeral, as the markets can change quickly and drastically reduce them - or even eliminate them altogether.
The rich didn't get rich by printing money. They got rich by appropriating the products of our labour-power.
Sorry Spector, but fiat money doesn't mean you can't buy gold, it means the government doesn't have gold to back it up. But I agree 100% about the rich getting rich by apropriating the products of the labour-poor. "Scarce money," (fiat or otherwise), is the weapon they use to convince the poor that they have no power. If we could change the nature of money then we could take away the power of the rich.
So what's the big problem? Having gold to "back up" the dollar is supposed to mean that you can exchange a dollar bill for a dollar's worth of gold from the government. But if you can do that on the gold market, it's exactly the same thing as far as the holder of money is concerned.
Besides, there's nothing magical about gold. Governments have lots of other assets and wealth in many forms to "back up" the dollar.
And I have news for you; the poor are right to believe they have no power in this society if they have no money - and it has nothing to do with the gold standard. Changing the "nature" of money (whatever that means) isn't going to give the poor any more power. If they want power, they must struggle to wrest it from the rich.
It means plenty to society, because ifthe government can print money without something of value behind it, then the money supply can increase. Can you just see them privatising the introduction of money into the economy,... oh wait,...
And somehow restricting the "money supply" is going to benefit the poor?
No way will a restricted money supply help the poor. Exactly the opposite. I strongly support a system of plentiful money, like the LETSystem as a method of democratising the economy. That would change everything.
So you want a system of plentiful money, but you don't like fiat money.
So I guess what you are hoping for is a major discovery of gold?
Catching leprechauns - now there's a great fiscal strategy!
Fiat money has been tried in China and other countries for a 1000 years.Forget it. Governments can,t be trusted ever.Don't we ever learn from history Some safe means for poorer people is necessary to allow them to save, for their old age.. It is gold and or silver. Why can't governments be trusted? Because they are controlled, they are puppets.Let me give you a very recent example. OWS Occupy Wall St because they are corrupt and greedy (I think so). However they are just a transactional busines of intermediaries which works under the present horrendous monetary suystem. This takes away the need for any successful focus on the ability to eradicate the Anglosphere who control central banks. Amazingly on the same day Paul Krugman a MSM shill (Economist) and Obama encourage this protest. Thank the protestors for their courage and then remind them of 1929 when the Banks were blamed but the central banks Fed etc retained all their power when it was they who had caused the problem, Philip
bama
This has nothing to do with "fiat money." Fiat money is still scarce money. We went off the gold standard here a long time ago which is why gold is no longer $32. an onunce. I am no fan of fiat money and have never advocated fiat money. Somebody else introduced that subject.
I'm talking about plentiful money as in the LETSystem, but with a broader base. The money itself has no value at all, but the system has great value. The money is not intended to represent the value of goods or services traded. It is only an accounting of what has been bought and sold, for those who feel the need to record such things.
Outside of that, what the system does is eliminate the artificial economy of currencies, stocks and bonds. The decision making process is moved into the real economy of goods and services and put in the hands of the common people. It is literally the democratisation of the economy. Read my paper.(http://www.fredwilliams.ca/thesecretofmoney.html)