Sophistry or Shibboleth? - "Printing Money"

Nothing has demonstrated how little economists understand about their subject more than the rumpus over the US debt ceiling. What is concerning, though, is how few journalists seem to have called out these misunderstandings. Consider the following quote from an article in the UK Daily Telegraph:

Creating a $1 trillion coin would effectively be money printing on a massive scale, said Philip Shaw, chief economist at Investec.

“If you raise the debt ceiling, you are selling bonds and taking money from asset managers and then spending it. You are not creating new money. If you create a trillion dollar coin, you are literally printing that,” Mr Shaw said.

Besides the obvious fact that you tend to mint coins rather than print them, what else is wrong with this soundbite?

For a change, let’s start at the point in the circulation where Investec wishes to start and treat them as the consolidated asset manager sector. This eliminates the complication of asset exchanges between asset managers and simplifies the problem to its essence; an asset manager ends up holding money when there is nothing else to do with it other than the last two ‘risk-free’ items on the list: buy a fixed-term fixed interest rate bond from the government or leave the money in the bank at a floating interest rate.

In the usual scenario, Investec swaps their money for a bond from the government. Around the same time, the government spends money into the economy equivalent to the value of the bond¹. That money will then circulate around the economy and end up at Investec as savings. Why? Because bonds are issued to offset the net savings of the non-government sector and the saving propensity of the currency area hasn’t changed. The result of the circular process is that Investec started with, say, $100 billion of money in the bank and finished with $100 billion of money in the bank and $100 billion of government bonds. A total of $200 billion in net financial assets.

In the alternative scenario, there is no option to buy a government bond due to debt limits. Therefore, the only option left for Investec is to leave their spare money on deposit at the bank. At the same time, the government deposits a coin with the central bank to top up the Treasury account and spends money into the economy equivalent to the value of the bond they would otherwise have issued. That money will then circulate around the economy and end up at Investec as further savings. Again, the savings propensity of the currency area hasn’t changed. The result of this circular process is that Investec started with $100 billion in the bank and finished with $200 billion in the bank. A total of $200 billion in net financial assets.

Exactly the same financial capital value, in other words.

The only difference is that the floating interest rate on the bank deposit is likely to be lower than the fixed interest rate on the bond, which means Investec will get a lower income if there are no bonds issued.

And that’s the real reason asset managers object to ‘printing money’. ‘Printing bonds’ provides them with a higher ‘basic income’, all at the taxpayer’s expense.

Upton Sinclair’s famous observation strikes again.

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