Why Not Just Print More Money?

With zero signs of inflation and weak economic growth we’re starting to see more comments about “printing money” to boost the economy.  For instance, the other day in the New Yorker John Cassidy discusses Adair Turner’s proposal to print more money:

Adair Turner, an academic, policymaker, and member of the House of Lords, has another idea. In his new book, “Between Debt and the Devil: Money, Credit, and Fixing Global Finance” (Princeton), Lord Turner argues that countries facing the predicament of onerous debts, low interest rates, and slow growth should consider a radical but alluringly simple option: create more money and hand it out to people. “A government could, for instance, pay $1000 to all citizens by electronic transfer to their commercial bank deposit accounts,” Turner writes. People could spend the money as they saw fit: on food, clothes, household goods, vacations, drinking binges—anything they liked. Demand across the economy would get a boost, Turner notes, “and the extent of that stimulus would be broadly proportional to the value of new money created.”

As you likely know, I am a real stickler for operational realities.  And this narrative does not mesh well with reality.

The term “printing money” is highly misleading.  First, all “money” is a financial asset.  And financial assets are, by definition, someone’s liability.  Some people seem to think there is such a thing as “debt free” money, but that is not true in a world of financial assets because all financial assets are someone else’s liability.  Of course, non-financial assets like gold are “debt free” because they’re no one’s liability, but we don’t exist in a world where gold or other non-financial assets serve as the dominant forms of money.

Second, the way most money is created these days is through the banking system in the form of loans which create deposits.  Some people still think the government controls the money supply, but this is only an indirect form of control.  For instance, when the Central Bank creates money via something like Quantitative Easing they can only change the composition of private sector assets by buying a financial asset in exchange for another financial asset.  This asset swap changes the composition of the private sector’s balance sheet, but it does not increase the net worth of the private sector.  Further, when the Treasury “prints” cash or mints coins these money items are then distributed through the banking system to deposit account users.  In other words, you need a deposit account to access this money and when you withdraw “cash” you are essentially swapping the composition of your deposit into a physical form of money.  You aren’t creating more money.  You are swapping your deposit for cash.  Again, there is no real “money printing” involved in any of this.