The subject line of this post is not entirely accurate.
We live in a modern era and the printing press of old is no longer required. Certainly not to create money. We now occupy a digital world. This enables governments to simply create money electronically. Although this process is described as “printing money” no physical bank notes are actually created. The newly created digital money is simply inserted directly into the financial markets, thereby boosting bond and stock markets. This has come to be known as quantitative easing or QE.
The financial world is in an interesting situation. Some may call the position precarious but perhaps interesting is a more moderate word at this time. One thing is certain. Global debt is at a level that has never been experienced before in our entire history.
Interest rates have been reduced to almost zero. This has provided an opportunity for individuals and companies to increase their levels of debt at virtually no cost. The covid pandemic has markedly increased this tendency to borrow money. As economic activity came to a halt across the entire world, citizens and companies have had to look for alternative sources of funding. Much of this was borrowed.
Many governments around the world stepped in with various packages to assist people and businesses. It must however be remembered that governments themselves create no income. They can only spend money they collect from taxes. In all cases around the world the money was never there in the first place, so governments effectively had to borrow it.
In the UK a furlough scene was implemented and is still running today. Various other grants and loans were also introduced. In South Africa the government provided relief funds totalling R500 billion, but unfortunately most of this was looted by corrupt ANC officials.
The pandemic cannot be blamed for the enormous debt levels. Money creation began in earnest when President Nixon removed the gold standard in 1971. This allowed banks to start creating money with nothing to back it. Soaring global debt triggered the Lehman Brothers collapse in 2008 but the response of central banks was simply to create more money. The UK’s QE programme was meant to be a temporary scheme. The policy was a one-off emergency measure, because interest rate cuts were deemed insufficient to prevent a banking collapse. The Bank of England has made the following asset purchases, all funded by debt, since 2008. These numbers are cumulative –
- 2009 – Financial crisis – £200 billion
- 2012 – Eurozone debt crisis – £375 billion
- 2016 – Brexit referendum result – £445 billion
- 2020 – Coronavirus pandemic – £895 billion
When the latest round of QE is complete, the Bank of England will hold well over a third of the national debt. The latest government statistics in the UK, published on 20 November 2020 by the Office for National Statistics, shows that the UK’s total debt stands at £2.09 trillion at the end of October 2020.
Many other central banks around the world are also printing money. The biggest increases to government balance sheets (and debt) are in the following countries-
An interesting graphic can be viewed on this link.
I do not believe that these debt levels can continue to rise indefinitely without serious financial implications. Anything that can be produced in unlimited quantities at no cost can by definition not be worth more than ZERO.
I will explore QE in more detail in my next letter and also introduce two additional concepts. One is fairly new (modern monetary theory) and the other very old (inflation).
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