Money printing – what’s wrong with it?
As it appears, monetary policy of quantitative easing, which in practical terms mean printing new money, implemented by the Federal Reserve bank since the economic crisis in the US, and more recently by the ECB in the Eurozone, did not bring economic catastrophes as some predicted. If so why not to do it even in wider range? Why not make our citizens rich by dropping on them US Dollar and Euro bills out of the helicopter?
Of course there are many problems with this policy.
1. The newly printed money is channeled in certain way, and through certain financial institutions. For example if the newly printed money is used to purchase government securities, their price will rise, and this means lower interest rates. Then the monetary investors, mainly pension funds and small investors, who try to preserve the value of their life savings for the hard times are impoverished, while the economically active entrepreneurs, who base their economic activities on credit are enriched. This enlargement of gap of income, we see everywhere. It causes social and political disruptions, but also negatively influences the aggregative demand, since the top rich have limited capacity for demand, so it has deflationary influences too.
2. The newly printed money is channeled to the economy through financial institutions, mainly banks, and the top managers of these banks, who use some of this money for their own enrichment, and even worse, to buy political influence. This phenomena even more impoverishes those who are out of the circle of the few on the top. More damaging than this is the monopolization of resources in the economy, that is direct result of concentrated financial power in the hands of view.
As example i would bring the mining industry of most of the basic raw material production like oil, ore and even fertilizers concentrated in very few hands. This has negative effect on both, the price level for the users, and the consumers, who are forced to pay higher prices, who are again the masses not connected to the top. But monopolization in the economy is not just in the resources. It is in the financial world too. No one can compete the very few biggest US, European and the Swiss banks, behind them are the three most worldwide used currencies, which are the basis and the point of reference to most of the other currencies in the world.
3. Excessive money printing will eventually make the money very abundant. Abundance of some item makes it cheap, (like glass crystal compared to diamond crystal). It means the money necessarily will lose its value. Or in other words the inflation is a necessary outcome of such a policy. Inflation did not occur yet, because the banks, following the 2008 meltdown needed to build up reserves to save themselves. Also new International regulatory framework for banks called Basel III, introduced by Basel Committee on Banking Supervision since the economic crisis, forced the banks to squeeze the credit. This era of stabilization of the banking system is coming close to its goals, and probably the monetary squeeze the banks caused will end. All these occurrences will bring instability to the world economy.
4. While the monetary policy strongly influences the aggregative demand, it has relatively little direct influence on the aggregative supply. Its direct influence on supply is mainly through the interest rate.
The aggregative supply is more influenced by technological development, and/or by limited resources which can have different nature. The main limited factor in last years has been the negative environmental impact of the economic activity. At first it forced the producers to introduce expensive equipments and cleaning systems into the production processes. Now the new events are more intensive and catastrophic. It is caused more often by natural disasters caused by changes in the world environments. (as example i would use the Fukushima nuclear disaster, even if not caused directly by the human activity, it could have such an immense consequences, because of the concentration of nuclear power plants in one, not very appropriate spot, due to lack of alternative more appropriate locations. All these economic events have limiting influence on the supply side if the economy. Of course these limiting factors are mostly balanced and even overbalanced by the technological developments, but as well known, technologic development is unpredictable, so is its economic, political and social influence.
5. What the recent economic history teaches us is that monetary policy on the global scale is able to moderate economic imbalances between the countries, and also on the time scale between the present and the future. But it is doing it through the tool of borrowing from those who accumulate assets in monetary form as savings, to those who accumulate it in physical form as investments in economic assets, be it tangible or intangible assets (knowhow, good will, etc.). Then when the day of repayment comes, and it doesn’t come in a smooth flowing way, but rather in big chunks the whole system tends to collapse. The collapse is not good for those who saved their money, and not to those who borrowed it with a perspective of future income and profits. The only one who can gain from this collapse are the financial sharks, who know how to react to any new financial circumstances, and who are close enough to the events to be the first to react. And as to my opinion their impact on the economy is mostly if not entirely only negative.