|With millions of people out work, some experts have suggested a solution to keep the economy on “pause” by printing infinite money. / Photo by: zefart via Shutterstock|
As lockdowns increase in many countries, concern grows about the economic impact of the pandemic. Even the United States, one of the wealthiest nations in the world, is feeling the disruptive effects of the health crisis on its economy. For instance, more than 22 million Americans have filed for unemployment aid since the country has declared a national emergency due to the Covid-19 outbreak.
Will infinite money save the economy during a pandemic?
With millions of people out work, economic activity stagnating, and businesses closed, some experts have suggested a solution to keep the economy on “pause” by printing infinite money and giving it to people and businesses to somehow keep things the way they were before the outbreak.
To ensure that a country’s economy remains healthy, it is the job of the central bank to regulate the amount of money that is circulating. Central banks of different countries use methods to control the quantity of money, depending on their power and the economic situation. In the US, the Federal Reserve, commonly referred to as the Fed, controls the money supply.
Brown University’s Professor of Economics David Weil, who is also the director of the James M. and Cathleen D. Stone Wealth and Income Inequality Project, shared via Canadian-American magazine Vice that the idea of printing infinite money is “complicated” but it does not mean that a country should not do it.
Quantitative easing (QE) programs
Weil said that we are now in an unusual period, where the Fed can print money and people would be happy to hold that special asset and trade it for other assets. We refer to that as monetary expansion or quantitative easing. The process involves the central bank printing money and using that money to purchase private sector or government securities or directly lend it through banks to pump cash into the country.
Put simply, the Fed is not just sending money to people. What it does is it trades the money for other assets.
However, people won’t hold that money in the long run and exchange it for assets, such as shares of stock or houses, Weil warned. As the money is just going around and people have more money than before, they try to purchase things from each other and if everyone has more money, the prices of assets and real goods will eventually go up. So, the Fed will take the money back in an attempt to prevent inflation.
It is not free money because it will, later on, result in government debt. Such debt will be paid by the present or future generation. This is why there is no such thing as “money magic printing.”
|The Fed can print money and people would be happy to hold that special asset and trade it for other assets./ Photo by: thitikan chuachan via Shutterstock|
Currency in circulation: value
The Federal Reserve published that the currency in circulation in 2011 amounted to $1,034.5 billion, which increased to $1,127.1 billion a year after. In 2013, the currency was worth $1,198.3 billion, 2014: $1,299.1 billion, 2015: $1,380.0 billion, 2016: $1,463.4 billion, 2017: $1,571.1 billion, and 2018: $1,671.9 billion.
Cost of new currency
Introducing new currency into the economy also involves cost, which includes printing, destruction of the mutilated currency, and transportation. The Fed spent $650 million for introducing new currency in 2011, $721 million in 2012, $717 in 2013, $707 million in 2014, $689 million in 2015, $660 million in 2016, $674 million in 2017, and $800 million in 2018.
The banks are now facing the call to print money to directly finance government spending amid the pandemic, international daily The Financial Times also highlighted. It pointed out that in the past, central banks also gave freshly-printed banknotes to governments during times of emergency such as war but “the world is not yet in that position today.” The Financial Times' editorial board believes that the monetary financing tool can be used by policymakers but it can also lead to hyperinflation if used without limits.
In economics, hyperinflation is very high inflation and it occurs when the prices of goods and services rise more than 50% per month. The Open University’s lecturer in economics Alan Shipman cited what happened in Zimbabwe and Venezuela. When these two countries printed more money to help grow their economies, prices also increased faster until they suffered from hyperinflation.
Citing hyperinflation in Zimbabwe
In 2008, prices in Zimbabwe rose as much as Z$ 231,000,000% a single year alone. An item that cost Z$1 before hyperinflation has cost Z$ 2310 million a year later. Not to mention that the cost involved in printing the banknotes was worth more than banknotes printed on it.
Shipman explained that for a country to get richer, it has to make and sell more things, whether that be in the form of goods or services. The whole process makes it safer for the central bank to print more money so its citizens can purchase extra things. If it will just print more money but not make more things, the prices will go up.
Venezuela also tried to protect its citizens from hyperinflation by keeping the low prices on essential items, such as food and medicines, but that also meant that shops and pharmacies can run out of those things.
Central bankers have also mentioned that the newly-created money under QE is not permanent. One day, it will be removed from the economy.
Shipman opined that the situation in Zimbabwe and Venezuela is different than that in the US. It is already very rich and most of the valuable things that other countries buy and sell, including oil and gold, are often priced in US dollars. On the other hand, if poorer countries print more of their currency, prices go up and they tend to stop using the money. People instead swap goods or ask that they’d be paid in US dollars.
To combat the increasing prices, central bankers can either raise interest rates or undo the QE programs. Other countries have relied on helicopter money or handing cash to people. Some experts do not view helicopter money the same as QE. QE involves “asset swap” while helicopter money gives away the money without increasing assets on its balance sheet. The economic consequence of helicopter money is irreversible and permanent.
There is no quick escape for economies ravaged by the pandemic. Authorities around the world would have to go find strategies to bring back a weakening economy.