Why can’t governments print an unlimited amount of money? - Jonathan Smith

Summary

The COVID-19 pandemic in 2020 led to massive job losses and business closures, prompting governments to introduce unprecedented economic relief packages. Central banks, however, cannot simply print unlimited money due to the risk of inflation. Instead, they use quantitative easing, where they purchase bonds to increase cash flow without directly printing money. The Federal Reserve's strategy of buying unlimited treasury bonds in 2020 provided the U.S. government with funds for relief efforts, while also encouraging investment in riskier entities to stimulate economic growth. Despite concerns over potential long-term consequences, this approach has been deemed necessary to stabilize economies.

Takeaways

• 🌐 The COVID-19 pandemic in March 2020 had a global economic impact, leading to massive job losses and business closures.
• 💼 Governments worldwide responded with significant economic relief packages, with the U.S. spending $2.2 trillion in the first round.
• 🏦 Central banks, independent of governments, manage the money supply to prevent political interference.
• 🚫 Governments cannot directly increase the money supply; central banks determine the amount in circulation.
• 💡 Central banks could theoretically print unlimited money, but this is a short-term solution with potential long-term economic harm.
• 📈 Excessive money in circulation can lead to inflation, where prices rise and purchasing power decreases.
• 🔄 A moderate level of inflation is considered healthy for the economy, but too much can be detrimental.
• 💸 Central banks use quantitative easing to inject cash into the economy without high inflation risk by purchasing bonds.
• 📊 When the central bank buys bonds, it creates new cash, adding to the money supply without directly printing money.
• 🇺🇸 The Federal Reserve's actions during the 2020 crisis included buying unlimited treasury bonds to support government relief efforts.
• 🔑 The Federal Reserve's bond-buying strategy aims to lower returns on bonds, encouraging investment in riskier entities like small businesses.
• 🤔 Some economists are concerned about the implications of central banks buying government debt, fearing it could undermine the economy's stability.
• 🔮 While quantitative easing is a relatively new approach, it has been used to stabilize economies and its long-term effects are still being assessed.

Q & A

What was the impact of the COVID-19 pandemic on the global economy in March 2020?

The COVID-19 pandemic in March 2020 caused a significant economic shock worldwide, leading to millions of people losing their jobs and many businesses struggling or shutting down completely.

What did governments do in response to the economic crisis caused by the pandemic?

Governments responded by implementing some of the largest economic relief packages in history, with the United States spending $2.2 trillion on a first round of relief.

Why can't governments simply increase the money supply to fund relief efforts?

Governments can't just increase the money supply because it's managed by the central bank, which is independent to prevent political interference and ensure stable economic policy.

What is the potential negative consequence of central banks authorizing the printing of unlimited money?

The potential negative consequence is inflation, where an increase in money supply without a corresponding increase in goods and services leads to higher prices and a decrease in purchasing power.

What is the ideal level of inflation considered healthy for an economy?

A little bit of inflation, about 2% a year, is considered a sign of economic health, indicating that the economy is growing.

What is quantitative easing and how does it differ from simply printing money?

Quantitative easing is a monetary policy where a central bank increases cash flow by purchasing bonds from other entities. Unlike simply printing money, it involves creating new cash to exchange for bonds, which can stimulate the economy without causing severe inflation.

How does buying bonds by a central bank differ from an individual buying bonds?

When an individual buys a bond, they are using existing money in circulation. However, when a central bank buys a bond, it creates new cash, effectively increasing the money supply.

What role did the Federal Reserve play during the 2020 pandemic?

The Federal Reserve pledged to buy unlimited treasury bonds, providing the U.S. government with an unprecedented amount of money to fund relief efforts such as stimulus checks and unemployment benefits.

How does the process of the Federal Reserve buying bonds affect other investors?

By buying a large number of bonds and effectively lowering their return, the Federal Reserve incentivizes other investors to lend to riskier entities like small and midsize companies for a decent return, encouraging lending and economic growth.

What concerns have been raised about the Federal Reserve's pledge to buy unlimited government debt?

Some economists are concerned that it could lead to a situation where the government issues more bonds that the central bank would purchase, potentially allowing the government to never pay back its debt to the central bank, which could be seen as a subversion of the economic system.

What are the potential long-term consequences of quantitative easing?

While quantitative easing has become more common and has helped stabilize economies in the short term, it is still a relatively new approach, and its long-term consequences and effectiveness in boosting economic growth are still unfolding.

Outlines

00:00

📉 Economic Impact of COVID-19 Pandemic

The COVID-19 pandemic in March 2020 caused a global economic shock, leading to massive job losses and business closures. Governments, including the United States, introduced unprecedented economic relief packages, with the U.S. spending $2.2 trillion in the first round. The central bank's role in managing the money supply is crucial to prevent political interference and ensure economic stability. Despite the government's ability to implement economic policies, it cannot unilaterally increase the money supply, which is determined by the central bank. The potential risks of printing unlimited money include inflation, which can erode purchasing power and destabilize the economy.

💰 Central Banks and Money Supply Management

Central banks are tasked with managing the money supply to maintain economic stability. While they could theoretically print unlimited money, this is not a sustainable solution due to the risk of severe inflation. Inflation occurs when there is too much money in circulation, leading to higher prices and reduced purchasing power. Central banks have adopted quantitative easing as a method to increase cash flow without causing runaway inflation. This involves purchasing bonds from entities, effectively creating new money to inject into the economy. The Federal Reserve, for example, bought U.S. treasury bonds during the 2008-2009 financial crisis and again in 2020 to support relief efforts, such as stimulus checks and unemployment benefits.

🏦 Quantitative Easing and Economic Recovery

Quantitative easing is a strategy used by central banks to stimulate the economy by increasing the money supply through bond purchases. When a central bank buys bonds, it creates new cash, which was not previously in circulation. This differs from an individual buying bonds, which only recycles existing money. The Federal Reserve's commitment to buy unlimited treasury bonds in 2020 provided a significant amount of cash to the U.S. government for relief efforts. This approach also encourages other investors to lend to riskier entities, promoting economic growth over time. However, concerns have been raised about the long-term implications of central banks buying government debt, including the potential for governments to avoid repaying their debts by issuing new bonds to pay off old ones.

Keywords

💡COVID-19 pandemic

The COVID-19 pandemic refers to the global outbreak of the novel coronavirus that began in late 2019 and has led to widespread health and economic crises. In the video, it is the catalyst for the economic downturn and job losses, prompting governments to respond with relief packages.

💡economic relief packages

Economic relief packages are government initiatives designed to provide financial support to individuals and businesses affected by economic downturns or crises. The video highlights the United States' $2.2 trillion relief package as an example of such measures in response to the pandemic.

💡central bank

A central bank is an institution that manages a country's monetary policy, controls the money supply, and is typically independent of the government to maintain economic stability. The video explains that central banks, unlike governments, have the power to influence the money supply but must do so cautiously to avoid negative consequences.

💡money supply

The money supply refers to the total amount of money available in an economy at a given time. The video discusses how the central bank, not the government, determines the money supply and the implications of increasing it without limit.

💡inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video explains that an excess of money in circulation can lead to inflation, where the value of money decreases over time, as seen in the example of manufacturers raising prices.

💡quantitative easing

Quantitative easing is a monetary policy in which a central bank creates new money to buy government bonds or other securities to inject money into the economy and stimulate economic activity. The video describes this approach as a method used by central banks, including the Federal Reserve, to infuse cash without causing severe inflation.

💡bonds

Bonds are debt securities issued by corporations or governments to raise capital by borrowing from investors. In the video, bonds are explained as a form of loan where the lender (investor) receives interest over time, and this concept is central to the process of quantitative easing.

💡Federal Reserve

The Federal Reserve is the central banking system of the United States, responsible for implementing monetary policy and ensuring financial stability. The video discusses the Federal Reserve's role in buying unlimited treasury bonds to support the U.S. government's relief efforts during the pandemic.

💡treasury bonds

Treasury bonds are debt securities issued by a government to finance its spending needs. In the video, the Federal Reserve's purchase of U.S. treasury bonds is highlighted as a means to provide the government with funds for relief efforts, illustrating the relationship between monetary and fiscal policy.

💡stimulus checks

Stimulus checks are direct payments made by a government to individuals as a form of economic stimulus. The video mentions stimulus checks as one of the relief efforts funded by the government using the money supplied by the Federal Reserve through the purchase of treasury bonds.

💡economic growth

Economic growth refers to the increase in the production of goods and services in an economy over a period of time. The video discusses how the central bank's actions, such as quantitative easing, aim to promote economic growth by encouraging lending and investment, rather than simply increasing the money supply.

Highlights

The COVID-19 pandemic in March 2020 caused a global economic shock with millions losing jobs and businesses struggling.

Governments responded with massive economic relief packages, with the U.S. spending $2.2 trillion on the first round of relief.

Central banks manage the money supply independently to prevent political interference.

Governments cannot increase the money supply; central banks determine the amount in circulation.

Central banks could print unlimited money, but it's a short-term solution with potential long-term economic harm.

Increased money circulation can lead to inflation, where prices rise instead of production increasing.

Moderate inflation, around 2% annually, is seen as a sign of economic health.

Quantitative easing is a method used by central banks to infuse the economy with cash while controlling inflation risks.

Central banks increase cash flow by purchasing bonds, creating new money in the process.

Buying bonds is akin to lending money with the expectation of repayment with interest.

When the central bank buys bonds, it creates new cash, different from an individual's bond purchase.

The Federal Reserve bought unlimited treasury bonds during the 2008-2009 financial crisis and in 2020.

Treasury bonds are considered a safe investment, with the U.S. government guaranteeing repayment with interest.

The Federal Reserve's bond purchase lowered returns, encouraging investment in riskier entities like small businesses.

Quantitative easing aims to boost the economy over time by facilitating lending and investment.

The Federal Reserve's unlimited bond purchase raises concerns about potential subversion of the economic system.

Some economists argue that central bank measures to buy government debt are necessary for economic stabilization.

Quantitative easing is a relatively new approach with ongoing potential consequences.

Transcripts

In March 2020, the COVID-19 pandemic rocked economies worldwide.

Millions of people lost their jobs,

and many businesses struggled to survive or shut down completely.

Governments responded with some of the largest economic relief packages

in history—

the United States alone spent $2.2 trillion on a first round of relief.

So where did all this money come from?

Most countries have a central bank that manages the money supply

and is independent from the government to prevent political interference.

The government can implement many types of economic policy,

like decreasing people's taxes

and creating jobs through public infrastructure projects,

but it actually can’t just increase the money supply.

The central bank determines how much money is in circulation at a time.

So why can’t central banks authorize the printing of unlimited money

to help an economy in crisis?

They could, but that’s a short-term solution

that doesn’t necessarily boost economic growth in the long-term,

and can actually hurt the economy.

Why?

With more money in circulation,

manufacturers of goods like food, clothing, and cars

could respond to demand simply by raising prices,

rather than manufacturing more of these goods

and creating new jobs in the process.

This would mean you could no longer buy as much with the same amount of money—

a situation known as inflation.

A little bit of inflation, about 2% a year,

is considered a sign of economic health, but more can quickly derail an economy.

In recent decades, central banks have tried an approach

called quantitative easing to infuse the economy with cash

while maintaining a low risk of severe inflation.

In this approach,

a central bank increases cash flow by purchasing another entity’s bonds.

Anyone can buy bonds from corporations or governments.

When you buy a bond, you’re essentially loaning money to the company—

or government— with the promise that they’ll pay it back later with interest.

This is why buying bonds is sometimes referred to as buying debt.

When an individual buys a bond, they're using money that's already in circulation.

But when the central bank buys a bond, it essentially creates cash,

supplying money that didn’t exist before in exchange for bonds.

Both during the 2008-2009 financial crisis and again in 2020,

the United States’ central bank, the Federal Reserve,

bought bonds from the US government called treasury bonds.

Historically, many people have purchased these bonds as a safe form of investment,

knowing the US government will pay them back with interest.

In early 2020, the Federal Reserve pledged to buy unlimited treasury bonds,

loaning the U.S. government an unprecedented amount of money—

cash that the government used to fund relief efforts

like stimulus checks and unemployment benefits.

This isn’t equivalent to simply printing money,

though it may sound similar.

Because of the way bonds are priced, by buying so many,

the Federal Reserve effectively lowered the return on them,

which incentivizes other investors to lend to riskier entities—

like small and midsize companies— in order to get a decent return.

Encouraging lending this way should help companies of all sizes borrow money

to funnel into projects and hires,

boosting the economy over time in addition to helping the government

supply people with urgently needed cash in the short term.

The Federal Reserve’s pledge to buy unlimited government debt

has raised some questions— and eyebrows.

In theory, this means the government could issue more bonds,

which the central bank would purchase.

The government could then use the money from the new bonds

to pay off the old bonds,

effectively meaning the government never pays back its debt to the central bank.

Citing this and other theoretical scenarios,

some economists have raised concerns that a central bank buying government debt

is a subversion of a system designed to protect the economy.

Others have insisted these measures are necessary,

and have so far helped stabilize economies.

Though quantitative easing has become a lot more common in recent years,

it’s still relatively new, and potential consequences are still unfolding.