The Private Federal Reserve has sustained Markets by Fundamental Money Printing

What happens when Money Printing becomes ineffective?

The Central Bank Dilemma

In times of emergency, particularly war, central banks have often handed freshly printed banknotes to governments. The fight against resultant inflation was postponed until after any crisis. Despite the pandemic, the world is not yet in that position today. There is no need, for now, to relax the framework of independent, inflation-targeting central banking. Yet this kind of monetary financing should be a tool available to policymakers, if needed. Without limits, allowing a government to finance itself by creating money can lead to hyperinflation. But these risks can be manageable: the quantitative easing of the past decade, despite predictions, has not lifted inflation above the main central banks’ 2 per cent targets.

The money pumped into rich-world economies has been met by increased demand, perhaps permanently, for precautionary saving. There is no clear distinction between quantitative easing and monetary financing. Central bankers say asset purchases under QE are temporary, meaning the newly-created money will one day be removed from the economy. But it is hard to bind the hands of their successors, who could one day make them permanent. Either way, the effect is to lower the cost of government borrowing. Buying the bonds only after they have been sold to private investors still frees up funds for new issues. Recent QE programmes, in fact, look increasingly likely to become permanent. Central bankers were unable to complete a much-discussed programme of “normalising” monetary policy between the financial crisis and today’s crash. They are not going to be able to do so any time soon. Credit: FT

Conclusion:  Central Bankers are now handcuffed to continually printing money to support the economy. But, the effectiveness of printing money is becoming increasingly less efficient. It is only a matter of time until printing money will no longer be viable.