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The Poison of Central Planning

The Poison of Central Planning

As is well known, central banks around the world have deployed a range of “unconventional policies” in recent years, ranging from imposing zero to negative interest rates, to outright money printing (QE).

Silvana Comugnero

Photo via americanpatriotdaily.com

We have seen a number of people argue that “QE” does not really involve “money printing”, but as we have explained at length, these arguments are misguided (see e.g. our in-depth discussion of the modus operandi of the Fed here: “Can the Fed Print Money?”).

1-TMS-2Additional money created in the US economy since January of 2008 (inside the blue rectangle). The Fed created most of it – click to enlarge.

As far as we understand it, the first error is the belief that only bank reserves are created, when in reality, bothbank reserves and deposit money are created in QE operations (the latter is clearly “money”, as it can be used for the final payment of goods and services in the economy). The second error is to argue that because new money isn’t just dropped from helicopters (not yet, anyway), but involves asset purchases, it somehow doesn’t qualify as “printing”. However, it is important to keep in mind that the money used for these purchases is still created ex nihilo, at the push of a button.

As an aside, it has by now become clear that the ECB also creates both reserves and deposit money to the extent of its securities purchases, whereas Japan’s case still requires some digging on our part which we haven’t gotten around to yet (Japan e.g. excludes deposits held by securities companies from its money supply data; in some ways this is sensible, as it allows for a more fine-grained analysis of money and its potential uses, but it may also disguise how much money the BoJ is really creating).

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