Printing money

IamtheWalrus

I'm reading The Undercover Economist and it speaks of printing money as a way of stimulating an economy.

I know that printing money would mean more money in total in an economy and that can lead to inflation (more money means prices adjust accordingly).

But who gets said money? When the central bank prints the cash, it doesn't distribute it to the public. In real terms, it essentially is the only 'richer' concern.

Can anyone shed light on this for me?

KyussBeeshop

The mere presence of newly printed money at the central bank, doesn't automatically lead to price inflation in the rest of the economy - that's not how inflation works.

Unfortunately people are led to believe a very misleading relation between money creation and an economy - that it is analogous to dividing a pie into smaller and smaller slices, the more you create money - rather than actually being able to grow the pie, by creating money.

If your economy has the capacity to grow through more money being spent (which is usually true when you are below full employment), then you can (not will - can...) actually grow the economy (the 'economic pie') through money creation, while still staying within central bank inflation targets.

If you keep creating money after your economy reaches full output capacity though (which is usually when you reach full employment), then you definitely will create inflation - and (depending on the rate of money creation) this can breach inflation targets, and can become excessive.


What you've hit on with your question, is that whether or not money creation is inflationary (and how much inflation - because if you stay within inflation targets, it's fair game), depends on what you do with that money:
1: If the money is not spent/invested, it has no effect on inflation.

2: If the money is spent in an area of the economy that is overheating (e.g. buying loads of houses when supply is constrained) it is definitely inflationary (even when the economy isn't at full output capacity).

3: If the money is spent in an area of the economy that has a large potential for growth (e.g. building houses when supply is constrained), and if enough labour is available, then you can create/spend money while staying within inflation targets.

3a: If you run out of labour in the above example though (e.g. by hitting full employment), then it definitely will be inflationary if you keep spending.

Geuze

IamtheWalrus wrote: »

I know that printing money would mean more money in total in an economy and that can lead to inflation (more money means prices adjust accordingly).

But who gets said money? When the central bank prints the cash, it doesn't distribute it to the public. In real terms, it essentially is the only 'richer' concern.

Can anyone shed light on this for me?

In QE, CB don't actually print new currency, first of all.

They buy financial assets, and pay for them with newly created money.

So the sellers of the assets get paid.

Water John

The sellers, banks get paid for assets nobody else would buy. It's a roundabout way of giving the new money to the banks.
Some economists, would be of the view, that to stimulate the economy in the last crash, the new money should have been actually put into peoples bank accounts.
People would then spend the money. It 's the circulation of money that really boots the economy. Problem was the bank sold poor assets and kept the money, to improve their own balance sheets and the economy stagnated and went into recession.

Geuze

Note that banks are not the only sellers of bonds to the QE programme.

andrew

IamtheWalrus wrote: »

I'm reading The Undercover Economist and it speaks of printing money as a way of stimulating an economy.

I know that printing money would mean more money in total in an economy and that can lead to inflation (more money means prices adjust accordingly).

But who gets said money? When the central bank prints the cash, it doesn't distribute it to the public. In real terms, it essentially is the only 'richer' concern.

Can anyone shed light on this for me?

A common way for the money to end up in circulation is for the Central Bank to 'monetise' government debt; essentially giving the Government the money. It does so buy purchasing Government debt on the market for Government debt. Then, when the time comes for the Government to repay the debt, the Government repays the Central Bank...which gives that money straight back to the Government (or just doesn't take it in the first place). So the government has essentially received free(ish) money

As posters above have noted, QE doesn't really involve printing money. In QE, the Central Bank purchases Government debt (and other assets, but mostly government debt) from banks, in exchange for cash, which banks then ostensibly go and invest in the real economy. So QE is more like a swap. But if Central Banks were to hold the Government debt they own (through QE) until maturity, then that'd be monetisation. I'm not quite sure whether this is what's happening in reality with ECB QE.

Also as another poster mentioned, whether the banks actually *did* lend out the cash received as part of QE is another story. As they mention, it might be that they essentially hoarded the cash. I'm sure there's been loadsa research on this, it's all part of a fairly interesting thing called the monetary transmission mechanism. But it's worth noting that arguably the cash which banks got didn't lead to much more lending, so people have proposed some other interesting ways to get the cash into the 'real' economy. This can be as simple as literally writing everyone a cheque for a given amount of money, using money the central bank provides. Well not a cheque, they'd just credit everyone's bank account. But would people spend this money or just save it? It's not that clear.

Water John

Thanks Andrew. The point is true, we're not sure if people would spend the new money in their accounts and put it into the economy. Some would but the numbers we don't know. What we do know, is that the banks did not put it into the economy.

Geuze

We do know that QE reduced long-term interest rates, as it is meant to do.