Printing Money Does No Harm
Published in die Tageszeitung
(Germany) on 22 June 2012
by Ulrike Herrmann (link to original)
Two economic crises and two different solutions: In the United States, the Federal Reserve (Fed) opts for massive intervention, while here the European Central Bank can often only watch helplessly while the Eurozone disintegrates. The difference is again visible as the Fed is pumps another $267 billion into the market in order to ratchet down long term interest rates. In total, the Fed's balance sheet has ballooned some $2.3 trillion in order to buy U.S. securities. What's normal business in the U.S. causes many Europeans to faint dead away. If a central bank prints money, inflation could threaten!
What is ignored, however, is that there isn't a trace of inflation visible in the United States. That's lesson number one: Monetary policy isn't dangerous. The central banks have the power to lower interest rates by purchasing government securities. For Europe, this fact can't be overstated. Spain and Italy both currently pay record interest to borrow money that is driving them into the poorhouse. This nonsense would come to an immediate halt if the European Central Bank would intervene in the market as the Fed routinely does in the United States. On the other hand, the U.S. proves that monetary policy alone isn't enough. Despite the billions of dollars unleashed by the Fed, the American economy has yet to improve. That brings up lesson number two: More money doesn't necessarily lead to greater demand. Nothing is gained if the money flows to the already wealthy or into bank accounts. That doesn't promote consumption, it promotes speculation. Those who already have enough money will only use more to play around with stocks, real estate, and derivatives.
The money needs to flow to the poor, the unemployed and to governments. Those entities can be counted on to spend it. In addition to a monetary policy, what's also needed is a money redistribution policy. Translated into everyday German, that means taxes on the rich have to go up. But that's another fact that unfortunately remains alien to the Europeans thus far.
What is ignored, however, is that there isn't a trace of inflation visible in the United States. That's lesson number one: Monetary policy isn't dangerous. The central banks have the power to lower interest rates by purchasing government securities. For Europe, this fact can't be overstated. Spain and Italy both currently pay record interest to borrow money that is driving them into the poorhouse. This nonsense would come to an immediate halt if the European Central Bank would intervene in the market as the Fed routinely does in the United States. On the other hand, the U.S. proves that monetary policy alone isn't enough. Despite the billions of dollars unleashed by the Fed, the American economy has yet to improve. That brings up lesson number two: More money doesn't necessarily lead to greater demand. Nothing is gained if the money flows to the already wealthy or into bank accounts. That doesn't promote consumption, it promotes speculation. Those who already have enough money will only use more to play around with stocks, real estate, and derivatives.
The money needs to flow to the poor, the unemployed and to governments. Those entities can be counted on to spend it. In addition to a monetary policy, what's also needed is a money redistribution policy. Translated into everyday German, that means taxes on the rich have to go up. But that's another fact that unfortunately remains alien to the Europeans thus far.