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Home > Capital Markets Best Practice > Why Printing Money Sometimes Works for Central Banks

Capital Markets Best Practice

Why Printing Money Sometimes Works for Central Banks

by Paul Kasriel

Executive Summary

  • There is a logical and defensible rationale for running the printing presses in the current economic climate.

  • The banks and two-year Treasury notes, how the banks are recapitalized.

  • Options that do not involve monetizing the debt–their disadvantages improve the argument for the monetizing approach.

  • Why TALF is essentially a Structured Investment Vehicle.

  • The possibility of a second recession in 2012.

Introduction

At the start of March 2009, even after the signing of the US$787 billion fiscal stimulus package from President Obama, doom and gloom was the order of the day from most commentators. The markets were extremely volatile, anticipating the imminent nationalization of one or more major US banks. The US commerce department released its fourth-quarter GDP data for 2008, which showed that the economy had contracted at an annualized rate of 6.2%, the sharpest contraction since the first quarter of 1982, when the economy fell back by 6.4%. In the light of this and the deepening global recession, very few economists were predicting growth restarting in Q4 2009.

Running the Presses at High Speed

Yet there is a very clear route and rationale for growth to come about in this sort of time frame. It all depends on how the Obama fiscal stimulus package is put into effect. In explaining this, we will, simultaneously, be demonstrating how it is that for a central bank, with an economy in this kind of difficulty, running the printing presses at high speed can be a highly responsible course of action.

Of course, if printing money were always a good thing, the Zimbabwean economy in 2009 would be a thing of wonder for the world, instead of the unmitigated disaster it certainly is. Printing money ultimately leads to price inflation, and from there, down the slippery slope to hyperinflation. Before things reach this pass, however, in the early stages, good things can be achieved, as we will demonstrate.

The basis for predicting growth in the fourth quarter of 2009 is an anticipation—at the time of writing, this was not yet a certainty—that the effects of increased federal government spending and tax rebates from the fiscal stimulus will come from the stimulus being largely financed by the banking system and/or the Federal Reserve. When the Federal Reserve and the banking system team up to buy debt, in combination they are, in effect, printing money.

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