Causes and Effects: Money Printing Spree by Central Banks

Over the years, Central Banks in general, and Federal Reserve, the American central bank, in particular, have relied heavily on printing money as a way to tackle an economic crisis. The latest testimony to that is the Covid-19 pandemic where the Fed printed around $3.5 trillion since the end of February 2020. The idea behind this is to drive down the interest rates which would help people/corporates/governments to borrow cheaply and spend more so as to keep the economy running. But, there are many flaws in this narrative, and to give you a disclaimer for this blog, it causes a HUGE impact in our day-to-day lives. Allow me to explain.

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Let’s take the example of 2007-08 global financial crisis. As Lehman Brothers, the fourth largest investment bank in the US, filed for bankruptcy on September 2008, financial markets all around the world started going haywire. This was the biggest bankruptcy in American history, and US economy has a very big impact on the world economy. The Fed responded by printing massive amount of money and lending it to other financial institutions to prevent similar fate. As Puja Mehra writes in The Lost Decade 2008-18

The Fed’s balance sheet expanded from $900 billion to more than $2 Trillion between September and December 2008 as it flooded the financial system with liquidity. Early 2009, the Fed pledged to pump an extra $1 trillion through a programme of buying treasury bonds and mortgage securities that became known as ‘quantitative easing’ or ‘QE’…. By 2015, three phases of QE had streamed $4.5 trillion into international financial markets.

What was true in 2008-09 is also true in 2020-21 and this has been done in many other countries, not necessarily in the same quantity. As a result, interest rates all over US, Europe, and some parts of Asia are either negative or considerably low. In India as well, Reserve Bank of India (RBI) has been cutting the repo rate (the rate at which RBI lend to banks) from 2019 itself. Cutting repo rate is generally an indication from the RBI to the banks to decrease their lending rates. This was done to tackle the slowdown which started way before the arrival of Covid-19. Also, recently RBI announced a Government- Securities Acquisition Programme (GSAP) which is basically more money printing in order to finance fiscal deficit of the government. Fiscal Deficit is the difference between what a government earns and what it spends.

Now, all this money printing has affected the people a lot. In India, more than 80% of the people invest in small-savings schemes, and fixed deposits. These are negatively affected when the interest rates goes down. When people, who invest in these schemes, are not able to meet their savings target due to lower interest rates, they start saving more. So the whole idea of increasing spending goes for a toss. But, no one seems to bother about it. As Vivek Kaul writes,

… [U]nlike the corporates and the government, the savers are not organised. Hence, almost no one is talking about them. In the latest monetary policy committee meeting [of October 2020], there was just one mention of them.

Much of the printed money from the west where interest rates are zero or negative, have also entered the markets of the world including India’s, looking for some returns. This can be concluded from the fact that Sensex, stock market index of the most famous Stock exchange of India, broke all its previous records with the highest amount of foreign investment ever. Stock prices have reached way more than company’s earnings could justify.

Well, this was also one of the main factors behind the discovery of bitcoin, one of the most famous cryptocurrencies. (However, I am not a bitcoin believer, but that’s another story for another day) As Ruchir Sharma writes in a column,

Bitcoin’s surge may still prove to be a bubble, but even if it pops, this year’s rush to cryptocurrencies should serve as a warning to government money printers everywhere … Do not assume that your traditional currencies are the only stores of value, or mediums of exchange, that people will ever trust. Tech-savvy people are not likely to stop looking for alternatives, until they find or invent one.

To conclude, this old trick of printing money is back in this pandemic. It may be viable for countries like the US as the US dollar has huge demand all over the world, but can prove to be counter-productive in India. It is already hurting all of us (the savers) and will continue to do so after the recent announcement by the RBI aforementioned.

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