Over the past decade or so, I have learned many things about the effects of printing money. They tell me that the economy is divided into the real economy and the virtual economy. The first means real money use and the latter mostly price changes in the financial market. The first is based on moving money so that something tangible changes hands. The latter is based more on expectations and images. These economies operate in parallel and interconnected, but their share of the total economy varies. Sometimes they support each other and sometimes the share of one grows too large, separating from the other. It begins to destroy the benefit of the other to citizens in the longer term, even if the short-term benefits seem to be the opposite. All figures in the article are from the United States, unless otherwise noted.
The differences have appeared as a result of the distribution of the "money printing". After the financial crisis, three different ways and targets for distributing the money have been tried: (The processes themselves are actually more complicated than I present, but don't let that distract you.
Increasing central bank reserves, i.e. distributing money through banks.
Increasing the national debt and distributing money through the administration.
Increasing the national debt by distributing money directly to citizens.
In the first way, the central bank buys bonds and at the same time its reserves grow. In this case, certain commercial banks can put more money into circulation in a certain proportion to the increasing reserves. (simplified explanation) This does not mean that it will happen. Over the past 15 years, this primarily benefited the virtual economy while preventing the collapse of the real economy during the financial crisis. Although this was mandatory during the financial crisis in order to end the deflationary spiral, it went too far and caused e.g. the following harmful side effects:
Massive overvaluations of bonds and other asset classes
Dysfunctional price formations in various assets
1st type of dependency relationship between printing and financial markets
A decrease in long-term productivity growth as money flows into less useful items, such as the purchase of own shares. In the 2010s, productivity increased by approx. 1.2%, while the annual growth from the beginning of the 1950s until the end of that decade was approx. 2%.
The growth of zombie companies and the favoring of large companies at the expense of small ones
Loss of morale and other negative side effects of saving fools
The increase in wealth differences, which leads to internal conflicts.
In practice, the method follows a decrease in the central bank's policy rate to close to or below zero. Longer-term zero interest rates and money printing provide a significant boost to the virtual economy. This excessive growth is out of the real economy. Contrary to many people's beliefs to the contrary, this does not lead to too much inflation in the real economy unless there are significant excesses in the increase of reserves. For example, in the 2010s, the amount of money grew by 80%, or about 6% per year. At the same time, inflation increased by about 20%, or about 1.8% per year. This way of distributing money is a gold mine for investors. Inflation does not disturb too much and returns cannot be prevented if there are investments and/or can afford to make them. This method is practically an indirect money transfer from taxpayers to investors.
Another way of distributing money does not need zero interest rates to be acceptable to citizens. This is how all deficit nations operate in normal economies. The majority of them do not indulge in excesses. Governments create new debt by selling government bonds, but they do so to a limited extent. At the same time, the amount of debt in the economy increases the most through commercial banks. A healthy market economy does not need large government borrowing or the "printing machines" of central banks in order to create sufficient money supply growth.
How the state spends the additional money matters to citizens. Spending money on debt doesn't increase inflation much, but it can keep it higher than normal. Productive investments can be inflationary in the short term, but in the longer term they reduce the growth rate of inflation or are deflationary. This method favors the real economy when it is done sensibly. Clear over-indebtedness with low productive investments can support the virtual economy in the medium term. This can now be seen in the United States, where the federal government's annual deficit per GDP is even higher than in Finland. The US economy is not on a sustainable footing now. It can be roughly stated that during the last 15 years this custom has been in full force for only a couple of years. At the same time, the federal budget deficit has been on the wrong side of 5% and real GDP has grown by approx. 3% annual rate. A large part of the economic growth has been brought about by government indebtedness.
The third method was introduced in the United States during the short economic crisis caused by the corona virus. Back then, the state took on debt and primarily sent it either directly to bank accounts or in the form of bank cards to its poorest citizens. Almost 800 billion of money was distributed directly to them. The distribution started in March 2020. This was not the only target for printing money. The amount of money increased by approx. 6000 crores in two years. Not all was distributed by the administration, but also the amount of money lent to consumers by commercial banks clearly increased. This meant a 40% increase in the amount of money, i.e. approx. 18% annual rate. The result was the rapid rise of the virtual economy. In the real economy, this did not show up as inflation until a year later. At the same time, inflation produced a decline in real incomes for a couple of years. As inflation subsided, real incomes also increased. This last method increased the budget deficit to double-digit percentages and is even less sustainable than the aforementioned methods. This experiment has shown that the so-called MMT worked because inflation destroys its benefits and magnifies its disadvantages.
Sources for financial figures:
https://www.usinflationcalculator.com/inflation/current-inflation-rates/
https://fi.investing.com/economic-calendar/real-earnings-890
https://tradingeconomics.com/united-states/money-supply-m2
https://stacker.com/business-economy/how-us-labor-productivity-has-changed-1950
https://www.thebalancemoney.com/us-deficit-by-year-3306306
https://tradingeconomics.com/united-states/gdp-growth-annual
Elections and printing money
Normally, elections do not have much importance for the economy, but now the situation is different. The US elections will be the most significant economic event in the world in the next couple of years, if the third world war does not start. Many people in Finland believe that the US presidential election will decide everything, but this is a result of not knowing the US political system. The president cannot make major changes without the Senate and the House of Representatives. In other words, the president is more or less like a lame duck without the support of the aforementioned. In the current situation, this means that the same party needs to gain control of all three in order to make bigger changes. It should also be mentioned that the House of Representatives has a two-year term and the Senators have a six-year term. This matters because representatives have a better chance of being re-elected by handing out money to the people than senators.
The best way to look at what can happen to a possible printing money is to look at the past. I don't think that we will hardly return to meeting three if the interest rates have not been reduced to zero before then. I believe that this is the most likely option of these methods if it is deemed necessary and the election result allows it. Recent history shows that the stimulus money was distributed in three rounds as follows per month: (control of the House of Representatives, the Senate and the President in parentheses)
March 2020 $1,200/taxpayer + $500 per child (Dem, Rep, Rep)
December 2020 $600 + $600 per child (Dem, Rep, Rep)
March 2020 $1400 + $1400 per child (Dem, Dem, Dem)
It should also be mentioned that Trump would have liked to pay a couple of tons a month in December 2020. The Republican-led Senate did not agree to this, so the sum was six hundred. I believe that both parties will accept this way of distributing money when a difficult economic situation hits, if they get control of all three for themselves. The control of the Senate is clearly more likely to be taken by the Republicans (the last reading I've seen was over 70%, but it's been a while) The presidential election is about 60/40 for the Republicans according to the betting offices, and the probability of the House of Representatives is approximately 50%.
The most likely option is a stalemate. The over-indebtedness of the United States will continue at roughly the same pace as it is now if there is no recession. If one party controls all three, then inflation on "steroids" is a likely option. The Democrats would probably achieve a bigger overshoot, but the Republicans won't be far behind. In this case, it is pointless to wait for a recession before the political situation changes. I personally hope for a stalemate, because then both parties will have to cooperate and the excesses will decrease. A longer deadlock will cause a situation in the medium-term (5-10 years) at the latest, where a recession makes the current or worse rate of indebtedness impossible, because the funding gap is too large to be managed without large reductions in income transfers or a surprising jump in productivity. This can happen quickly. In this case, both parties need to make unpleasant decisions if the Fed does not intervene by first introducing zero interest rates and the first way if the politicians do not jump directly to the three way. MMT on steroids for the next two years will result in bad decisions being pushed forward at least four years.
Finally, one more list of betting office odds for the presidential election:
https://www.realclearpolling.com/betting-odds/2024/president
-TT