Thoughts on “Why not print money?”

Richard Gilbert’s “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 channeling 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 US 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:

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 US 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.


  • Good post. The Bank of Canada’s take on QE is here and they find that it worked to a degree in the UK and the US. They would argue that the difficulty comes when the US and UK central banks will have to turn to sales rather than purchases of the government bonds, which will drive up interest rates in the future. They don’t speak to the issue of directly financing deficitis as opposed to printing money to buy bonds already out there on the market.

  • I’ve been saying this for years. Commented to this effect on this very blog a couple of times. Nobody ever answers.

    Guess it only makes sense when an expert says it. 😉

  • Andrew Jackson wonders whether it makes any difference whether, when the government runs a deficit, the central bank purchases government securities directly, as the securities are being issued on the primary market, or indirectly, on the secondary market, as the central bank purchases government securities that were previously issued and bought by private financial institutions or households.

    My take on this is that it makes no difference, a point already made by Joan Robinson in her 1937 book. Indeed, as was pointed out by a friend of mine in high places, the Bank of Canada now buys directly up to 15% of the federal government bonds being newly issued and 25% of the Treasury bills. Still nobody says that the Bank of Canada is printing stacks of money (nobody seems to care that the Bank is active on the primary market).

    As long as the Bank of Canada wishes to keep the overnight interest rate at its target rate, somewhere between the rate at which it remunerates settlement balances (reserves) and the rate at which it lends to banks, it has to sterilize in some way its direct purchases of securities when the government uses the proceeds of its T-bills sales to deficit-spend, and hence it does take sterilizing actions. If it did not, the amount of settlement balances in the financial system would rise above zero, and the overnight interest rate would drop below its target. But, this, as pointed out by Marc Lee, would not generally lead to inflation, and neither would it lead to an increase in the money supply (M1+), unless the fall in interest rates induced more (credit-worthy) borrowers to come forward and take new loans, thus creating new bank deposits.

    My view on QE1 and QE2 in the US is that QE1 was not really quantitative easing, it was credit easing, with a side effect on the amount of reserves held by US banks, as the Fed gave up on trying to sterilize its credit easing operations (purchasing private assets, in particular MBS). As to QE2, as pointed by Marc, it was designed to reduce long-term interest rates on government bonds, in the hope that other long-term rates would also fall. The main point to get straight is that the existence of excess reserves (or settlement balances) does not induce in any way banks to make more loans. It will not lead to more money creation. And the fact that US banks sit on huge excess reserves does not demonstrate in any way that banks refuse to lend.

    Quantitative easing has no direct effect on economic activity. Japan was reluctant to go with QE, because the Japanese thought it would be useless. They tried it, and verified that it had no effect to speak of (interest rates were already very low). By contrast, additional government expenditures will have a direct effect on activity and employment, which I think is Marc Lee’s main point.

    Also, we could have the federal government deciding that it will give $1000 extra to each Canadian below the poverty line, financing this by issuing bills purchased by the central bank. This would certainly give a boost to retail sales. Banks overall would wind up with excess settlement balances, remunerated at 0.75%, and then they would most gladly take the offer of the Bank of Canada to purchase T-bills with yields around 1% (now at 0.93%), through the repo market or open market operations.

  • Japan has a net creditor satus. They have lower interest rates then many Americans given they domesticly own there debt. The Japanese in the 1980s, 90s maintained a high saving rate in the teens, enjoyed solid investment, and high exports that “soaked up” yen due to trade surplusses. Americans in the 1930s were also high savers, high exporters, a creditor nation , while the Us dollar was still on the gold standard that capped spending artificially. They both have had deflation.

    The fact the US dollar has rallied less – less – less since 2008 when it rallied up towards of 25% should indicate a currency in falling in demand when risk-aversion trades fail to spark greater rallies in the traditional safe haven status of the US dollar should concern some canadians.

    John Maynard Keynes who Im sure you have respect for, in some way argued for those reperations “inter-war Germany” faced to be forgiven by the creditors, mainly the French and Brittish.

    Today the case for China and creditors of the US to forgive them in a restructuring of their debt holdings would be the equalivent of forgiving inter-war germany of their artificially induced debt after WW1.

    He did not argue for the artificially induced borrower Wiemar Germany to print money.

    John Maynard Keynes described the situation in The Economic Consequences of the Peace: “The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”

    The last time debt to GDP were at these levels, nor levels people wish them to be were during WW2. It would be interesting to note, then the criticisms of deficit spending from Keynes.

    “During World War II, Keynes argued in How to Pay for the War, published in 1940, that the war effort should be largely financed by higher taxation and especially by compulsory saving (essentially workers loaning money to the government), rather than deficit spending, in order to avoid inflation. Compulsory saving would act to dampen domestic demand, assist in channelling additional output towards the war efforts, would be fairer than punitive taxation and would have the advantage of helping to avoid a post war slump by boosting demand once workers were allowed to withdraw their savings”

    The economy of Hitler was largly on the backs of slave labor, ignoring the property rights of minorities for german citezens. The Rentenmark was indexed to a fixed ammount of gold.

    “The Reichsmark was introduced in 1924 as a permanent replacement for the Papiermark. This was necessary due to the 1920s German inflation which had reached its peak in 1923. The exchange rate between the old Papiermark and the Reichsmark was 1 ℛℳ = 1012 Papiermark (one “trillion” in US English, one “billion” in British English, German and other European languages, see long and short scales). To stabilize the economy and to smooth the transition, the Papiermark was not directly replaced by the Reichsmark, but by the Rentenmark, an interim currency backed by the Deutsche Rentenbank, owning industrial and agricultural real estate assets. The Reichsmark was put on the gold standard at the rate previously used by the Goldmark, with the U.S. dollar worth 4.2 ℛℳ.”

    “The Mefo bill (sometimes formatted as MEFO) was a system of deferred payment created by the German Minister of Finance, Hjalmar Schacht, in 1934. As Germany were rearming against the terms of the Treaty of Versailles they needed a way to fund rearming without printing notes; Schacht created this system as a temporary method to fund rearming with only one million Reichsmarks in capital.”

    “Schacht has later said that the device “enabled the Reichsbank to lend by a subterfuge to the Government what it normally or legally could not do”

    Hitler did not print money as his predecessors and the legal limit on interest was very high for the average german. Hitlers goverment borrowed, it did not print. It also instituted price controls, in whch later shortages developed for people like I in their 20s, and for people like my grandfather, and grandmother suffered immensly while those more established enjoyed their connections to the Nazi party, and benefits such free labor or even simple as food.

    “1938 unemployment was practically extinct and Germany even lacked enough workers to fill the available jobs. However this dramatic fall in unemployment levels was not all due to the creation of new jobs. Many Jews and women were forced out of their jobs and this made way for unemployed German men to take their place. However the women and Jews who had lost their jobs were not counted on the unemployment register. The Nazis considered Jews an inferior race and believed that women should stay at home so neither of these groups contributed to unemployment statistics”

    These two huge groups of the population were ignored by rule of law by a collective group. Slavery as with African Americans allowed for many workers to contribute their productivity without ever existing on paper.

    Then with a recent quote a from Obama.

    “We’ve been obsessing over the last couple of weeks about raising the debt ceiling and reducing the debt and deficit,” Obama said. “I’ll tell you what the American people are obsessing about right now is that unemployment is still way too high and too many folks’ homes are still underwater, and prices of things that they need, not just that they want, are going up a lot faster than their paychecks are if they’ve got a job.”

    This is the US president confirming that the prices at current levels are a for problem for many living americans who are getting pooer. Its a fact the income inequality is at its highest peak.

    Stagflation anyone???

    Right or worng, we can agree to disagree, to each their own on Inflation. Inflation is ultimatly a phenonmena, that can be good, but also bad. The worst rates of “inflaionism” occured under times of great rates on unemloyment. Keep that in mind, bloggers.

    Price increases right now are leading growth in wages, salaries, and fixed-incomes.

    Speculators are pushing up prices.

    Paul Vockler rose the cost of borrowing to over 20% to create a positive rate of interest that could keep a lid on the price increases of the 70s and induced a rescession, & deflation. Speculators were crushed as prices collasped for stocks. Gold collasped. Silver collasped. Oil….. Prices during the 80s also fell faster then wages.

    Today prices are rising faster then wages, somthing I was told deflation would keep in check….

    Here are some thoughts right or wrong.

  • Just have to pipe in on this one…Marc Lavoie is of course correct — the BoC typically buys anywhere from 15% to 20%+ of every new debt issue. I have documented proof (publicly available I might add) to this effect. I will post on this in the near future.

    The German wheelbarrow story is fascinating and Marc Lee’s points on this are astute. The story is even richer than he suggests however. Again, drawing on some great publicly available archive information (from the Kansas City Federal Reserve no less) collected by a good friend who is also deep in government, I’ll post on this shortly to hopefully explode the myths about this episode once and for all. Long and short of it: hyperinflation was DIRECTLY tied to reparation payments imposed by the WWI victors in the form of raw material exports and payments in a currency other than Germany’s. Again, stay tuned for a post on this, time and kids permitting. But the evidence is resoundingly clear that anyone who throws the wheelbarrow story at you has not read a lick of (real, as opposed to textbook) history.

    Lastly, on money creation and inflation. Asset swap is exactly right but remember, the mainstream channel/belief for inflation is built on what is called loanable funds theory, the idea that banks need reserves (settlement balances) first to lend. That view has long been shown to be false by Post Keynesians, notably Marc Lavoie above, but is slowly becoming conventional opinion in the highest places, including the Bank for International Settlement which in 2010 published a paper that questioned the textbook story that animates so much hyperventilation (not inflation) on this issue.

    Bottom line — and I’ll post on this too time permitting — is that the vast majority of debate about money printing (actually, accounting entries in the modern era; forget that noise about actual physical money) is simply coming at the question from a factually-incorrect perspective. Marc’s post and Marc Lavoie’s follow-up are steps in the right direction.

    Stay tuned…

  • Mario Seccareccia

    I have no problem in having greater central bank purchases of government securities. However, as I have pointed out to some of our good colleagues from the Commitee for Economic and Monetary Reform, if that were to be done systematically, the central bank would essentially lose control of discretionary interest rate policy, unless it also engages in systematic sterilsation of the increased settlement balances within the banking system, as Marc Lavoie has pointed out. However, some may well want to see abolished such discretionary interest rate policy (tied to the the Bank of Canada policy of inflation targeting), with interest rates being stuck at their minimum possible level, thereby ensuring in the longer term, for instance, Keynes’ euthanasia of the rentiers! But such ought to be well understood as an inevitable consequence of the so-called “printing money” policy of the central bank.

  • The whole idea of printing money and such seems to be a technical issue, at hand is the premise is it can be inflationary. But nowhere in the massive credit expansion pre-crisis did we experience such price pressures. Eventually credit and debt creation by the private sector surpassed all time debt levels, even Greenspan himself partially blamed the banking industry for taking policy down some pathways that nobody expected. (I read that pizza delivery workers were hired as mortgage brokers, as the mortgage industry geared up to flood the market with credit.) And I do think Greenspan became the whipping boy for many in the private sector.

    I am no monetary technical expert but given the run up in debt by the banks who lent out massive amounts pre-crisis, mainly for personal consumption, why is it so difficult during these times of insufficient demand, and idle productive assets, are we finding it so difficult to convince the monetarists that fiscal has got to be the new way forward. Instead of the banks lending to a record indebted private households who consume all now with no pay off for the productive capacity of the economy, how about public money being spent on smart productive public assets at hugely record levels.

    There is no fear of crowding out or inflation, as demand is dead. Ultimately it is that balance between inflation and public spending that we need to worry about, not debt.

    However it is so unorthodox but logical, I do wonder if someday we could see wide spread massive spending by governments the world over into a whole new level of smart investment. Its truly is the only option available to get us through this.

    But that would mean empowering government and we all know that after 30 years of neo-con cultural shifts in power, it will never happen.

    Capital needs capital to save itself and here we are again right back at the vicious cycle, not enough profit space within the investment horizon and so much jitters in the market place so every one just sits on there cash. Inadequate demand and a rotting asset base contaminated with co2 gluttons and layers of tech and informating ready to be deployed for transforming the production process.

    Print more money.

  • The Fed in the US holds about 11% of total outstanding public debt.

    Marc you might be interested in this from the BIS:

  • Sorry did not see that Arun had already linked to it.

  • Today’s post by Krugman on MMT seems very germane to this discussion. If I am not mistaken, he is making the same point as Mario.

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