If you’ve ever been confused by the term “Printing Money” then you’re not alone. Almost every day we heard the phrase being used in many different circumstances and with a rapidly changing meaning. If you’re unlucky, the meaning might be changed across sentences in the same conversation.
In this article, I’ll look to go over the most common economic phenomena that the term relates to, why they are done and what effects they can have on the economy. First off, we very rarely mean creating new paper notes when we talk of printing money. Most times, when we talk about printing money we mean debt monetization.
You can think of “printing money” to refer to any way of artificially increasing the money supply. i.e. adding more money to the economy without actually increasing economic input.
With that in mind, here’s what we’ll cover:
- Why would a government want to “print money?”
- How do governments “print money”?
- What are the possible consequences?
Why would a government want “new money”?
It’s an emergency measure to continue functioning while in debt.
Governments operate similar to businesses in that they make money (revenue) and they spend money (expenditures). Unlike most companies however, governments are almost expected to always run a deficit. This is where expenditure outpaces revenue.
Even though a government might be running a deficit, it will still need to carry out its functions. To do so it will need to get more money (the fancy name is called financing).
Here’s how governments raise money:
- Earn money through tourism and other capital ventures
- Increase taxes
- Borrow from local or international institutions
- Get “newly created money” from the central bank
What would the government need to get “newly created money”?
A government itself cannot put new money into circulation. Only the central bank can create new money by buying government debt i.e. bonds.
Firstly, the money is new because the central bank can essentially hop on a computer and create new credit with the click of a button.
Secondly, the process is artificial because debt instruments such as bonds are only promises of pay. They aren’t real money, and they do not have any inherent value.
Explain that one more time please?
It’s a two step process:
- Governments issue bonds.
- The Central bank buys these bonds – sometimes with money that didn’t previously exist.
As the government bounces back from whatever emergency occurred it will need to repay the central bank.
Why can it possibly be bad?
Inflation is the theoretical answer.
The problem with artificially increasing the money supply is inflation. With more money being available, the theory is that producers will charge more for their products – resulting in an overall increase in the cost of living. Since no new economic output is being realized, individuals may not be making enough money to keep pace with the runaway inflation.
Furthermore, the government could issue more bonds to be bought by the central bank in order to pay off old bonds – a potentially endless cycle where the government never actually pays back its debt to the central bank.
Overall, it’s important to remember that it is the central bank’s reason for being to manage the money supply and stop a country from spiraling into inflationary purgatory. Other ways central banks can influence the supply of money include: adjusting interest rates and modifying reserve requirements.
Conclusion
“Printing Money” in this sense is still a relatively new concept – having mostly examples with the 2008, 2009 crisis and now here again with the COVID pandemic. Economists themselves are split on the process with some expressing concerns of the long term effects with others being convinced of it being the only solution in extreme times such as these.
For now though, I hope this article was able to clear up some of the confusion surrounding this rather taboo topic.