With zero signs of inflation and weak economic growth we’re starting to see more comments about “printing money” to boost the economy. For instance, the other day in the New Yorker John Cassidy discusses Adair Turner’s proposal to print more money:
Adair Turner, an academic, policymaker, and member of the House of Lords, has another idea. In his new book, “Between Debt and the Devil: Money, Credit, and Fixing Global Finance” (Princeton), Lord Turner argues that countries facing the predicament of onerous debts, low interest rates, and slow growth should consider a radical but alluringly simple option: create more money and hand it out to people. “A government could, for instance, pay $1000 to all citizens by electronic transfer to their commercial bank deposit accounts,” Turner writes. People could spend the money as they saw fit: on food, clothes, household goods, vacations, drinking binges—anything they liked. Demand across the economy would get a boost, Turner notes, “and the extent of that stimulus would be broadly proportional to the value of new money created.”
As you likely know, I am a real stickler for operational realities. And this narrative does not mesh well with reality.
The term “printing money” is highly misleading. First, all “money” is a financial asset. And financial assets are, by definition, someone’s liability. Some people seem to think there is such a thing as “debt free” money, but that is not true in a world of financial assets because all financial assets are someone else’s liability. Of course, non-financial assets like gold are “debt free” because they’re no one’s liability, but we don’t exist in a world where gold or other non-financial assets serve as the dominant forms of money.
Second, the way most money is created these days is through the banking system in the form of loans which create deposits. Some people still think the government controls the money supply, but this is only an indirect form of control. For instance, when the Central Bank creates money via something like Quantitative Easing they can only change the composition of private sector assets by buying a financial asset in exchange for another financial asset. This asset swap changes the composition of the private sector’s balance sheet, but it does not increase the net worth of the private sector. Further, when the Treasury “prints” cash or mints coins these money items are then distributed through the banking system to deposit account users. In other words, you need a deposit account to access this money and when you withdraw “cash” you are essentially swapping the composition of your deposit into a physical form of money. You aren’t creating more money. You are swapping your deposit for cash. Again, there is no real “money printing” involved in any of this.
Now, when the government runs a budget deficit they are essentially “printing” bonds and adding them to the private sector. This adds to the net financial assets of the private sector because the non-government sector has a higher net worth. This can correctly be referred to as “bond printing”, but it is not the common way that people discuss “money printing” as is usually referred to in discussions about QE and Central Banking.
I don’t necessarily disagree with Adair Turner’s proposal. But we should be very clear about the way in which such a policy should be enacted. The Central Bank does not “print money” in any meaningful sense and neither does the Treasury when it creates cash and coins. If we are advocating “money printing” we should be clear that we are advocating “bond printing” and a higher deficit as that is the mechanism through which government adds financial assets to the non-government sectors.
Despite very low inflation, weak growth and no signs of a sovereign debt crisis in the USA, the idea of a higher government deficit to finance no-brainer policies (like infrastructure spending) still look politically impossible to me thanks in large part to the broad ignorance surrounding the operational realities and impacts of the aforementioned concepts.
* Confused? See the following pieces: