Central banks all print money

yourwealthourinterest-1A green activist against the proposed plasma gasification plant developed by Cahill asked me what would be
the implications of China weakening its currency. He was particularly interested in Chinese firms’ continued ability to invest overseas after the weakening of the yuan (China’s currency).

Much to the gentleman’s dismay, I am sure, I explained that the Chinese government has a huge surplus of
US dollar reserves, so the very small decline in the value of the yuan wouldn’t have any major impact on its investment activity abroad. In fact, the move is designed to stimulate the Chinese economy by making its exports cheaper, thereby incentivizing growth.

Currency wars. Printing money (quantitative easing in academic halls) is the term used to describe a central bank creating money and then injecting that into the economy. Six major central banks have openly printed money in the last decade: the United States, European, Switzerland, British, Japanese and Chinese central banks.

This has led to concerns of “currency wars” where countries would manipulate their currency to gain a competitive advantage. The term “currency wars” carries a political implication which is borne out by countries accusing each other of unfair trade practices while at the same time doing the same thing (a great example is the United States’ condemnation of China).

Advantages of printing money. The disadvantages of printing money usually are a weaker currency, which diminishes the spending power of the population and makes imports more expensive. However, if major central banks print money, there must be some advantage to it for the respective country.

From observation, international central bankers see the printing of money as a last-ditch, short-term measure when the economy is under strain and government spending is constrained.

Quotes from central bankers. Mario Draghi, European Central Bank (ECB) president: “The ECB cannot replace governments.”

The remainder of this quote is European financial jargon. However, it is in line with Mario Draghi’s rhetoric that central bankers have limited powers to affect the economy in the long run.

Ben Bernake, past chairman of the US Federal Reserve: “Monetary policy cannot do much about long-run growth; all we can try to do is to try to smooth out periods where the economy is depressed because of lack of demand.”

Note when a central bank prints money, this new money is given to banks who have more money to loan the population. The population increases its spending and prices go up.

The advantages of printing money are an increase in demand/an increase in the inflation rate, which should lead to greater employment as companies invest their money instead of leaving it in the bank to be ravaged by the rising inflation rate or respond to the increased demand. Thus the result of printing money can be more employment.

Caribbean central banks. Just to be clear, I am not advocating that any Caribbean central banks should print money. My intention is only to contextualize why, globally, central bankers and other stakeholders may see
few alternatives (given economic and political constraints), but to print. Indeed the regional central banks’ experiences are completely different, owing to managed or fixed exchange rates.

For most citizens, knowing when their respective central bank prints money in advance of the event would be advantageous, so that they could better plan their financial situation. This article shouldn’t be taken as an indication or early alert of any kind.

What I do advocate is that if Caribbean central banks do print money, they should structure it in a way that creates jobs linked to exports (or foreign exchange sectors), and not for the purposes of paying debt. Perhaps then the regional central banks will have stronger public support when printing money.

(Craig Harewood is the investment director at OurInterest Inc.)

Disclaimer: This article is intended to be general in nature, and is not meant to give specific investment advice to any individual. The author does not accept any liability for investment deals made or any action taken as a result of reading this article. The opinions, which are subject to change, are those of the author and not of any company within the OurInterest Group. 

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