Wolf: Fire Up the Printing Presses


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I think it’s not well-understood, even among politically informed Americans, that the US government can borrow as much money as it wants from the Fed and then hand it out to people for whatever purpose. But indeed we can, and Martin Wolf says we should in the FT:

The second response is that if governments need to run deficits, to support demand at a time of private sector weakness, they can always borrow from central banks. Yes, this is “printing money”. It is also an insanely radical policy recommended by no less insane a radical than Milton Friedman, back in 1948. His view was that the government could expand the money supply during recessions and contract it in the subsequent booms. A country with a fiat currency and a floating currency could, thus, stabilise the economy without destabilising credit markets. The neat thing about this proposal is that one does not have to decide whether fiscal policy or monetary policy is doing the heavy lifting: they are two sides of one coin.

The argument for aggressive monetary expansion remains strong, though not equally everywhere, since the growth of broad money and nominal GDP is weak (see chart). So Friedman’s policy of “quantitative easing”, as it is called, still makes good sense. Am I recommending the economics of Robert Mugabe? No. As in everything else, it is the context that matters. At present, we have “too little money chasing too many goods”. In this environment, monetary policy must be aggressive. When the economy recovers, the monetary effects should be withdrawn, via budget surpluses obtained via long-term control over spending.

To throw a little bit of water on this idea, it seems to me that it matters what the money is spent on. We don’t have a huge quantity of unemployed doctors, so targeted spending aimed at increasing consumption of medical care would be inflationary. But by the same token, we have tons of unemployment associated with the housing/construction sector and printing money to employ those people on infrastructure projects should have no ill effects.