Thin air for all: a quick solution to the global financial crisis?

As the new year has just started, here is my two cents to address the global financial crisis. I propose giving a little ‘gift’ to all those in need, rather than always taking away from the have-nots (or have-little) to give to the few haves. What’s the big idea? Let’s print money out of thin air and give each household below a certain income line (say, 25,000 USD per annum) a 2013 special gift. Crazy? Probably a lot of people would think so and stop reading here. But, believe me, it is based on sound economic analysis. Here is my argument.

As we all know, the global economy is made up mainly of virtual currency. That is, printed notes are a only a small fraction of the entire global market. Most of the global financial system is based on loans: IOUs among individuals, companies, investors and governments. This money doesn’t exist in reality: it is a series of contractual agreements to pay each other back. When we hear that the recession is ‘burning’ millions and millions of dollars/euros every day, what it means is that these IOUs are written off: people simply don’t pay back what they promised. In this financial system, private banks are the de facto creators of money, as they make loans on which they charge interest. If you get a loan for 10,000 bucks and promise to repay 15,000 bucks after a certain time, then the bank has just created 5,000 bucks out of thin air, which the bank can sell to another investor for a profit. This is why, for instance, the sub-prime market could infiltrate the rest of the financial world. Loans are sold as if they are a currency. When they are not paid back, we lose money. When millions of people do not pay back, the financial system crushes. And we lose money. Money that, in practice, we never had.

Ok. This was my first point. Here comes the second. We have always been told that one reason why governments are loath of printing money to address financial crises is that more money into the system is likely to push up inflation and undermine the long term credibility of a currency. As we know, several economists have disputed this traditional argument, maintaining that deflationary trends (as is the case in recessions) are more dangerous than inflation (this is a traditional argument put forward by Keynesians) and that prolonged recessions are unlikely to generate high rates of inflation in the short term. In fact, the Fed has done just that with the two ‘quantitative easings’ of the past years. They have bought state bonds and then given the profits back to the treasury. It’s the equivalent of the federal government giving itself money twice: read, printing money as it sees fit.

No matter where economists stand on the issue of printing money to address public debt, they’d probably agree that if governments were to print money out of ‘thin air’ for the equivalent amount that was lost since 2008, this would not have any inflationary impact. That money was already in the economy, albeit virtually through loans and IOUs. It was ‘burnt’ by a series of defaults and non payments. Putting it back would simply re-establish the financial volumes that we had before the crisis. Why should this have any inflationary risk? A possible way to do it, of course, would not be through printing actual money. Rather, governments could create interest-free loans and give one to each household with an income of less than 25,000 dollars/euros per annum. In the US alone, it would amount to roughly a 30,000 USD present for about 130 million people. This would make a huge difference for low-income families and bring a bit of justice into the picture. Moreover, it would turn the financial crisis into an historic redistribution process. It could become an example for the future: every time financial crises break out, money will get redistributed through society through governmental intervention. A warning for the powerful and a guarantee for the weak.

Banks have already been bailed out. Some of them are still being supported by public funds. So they’ve had their share of subsidies. Now it’s time for families to take a breath of fresh air. As you can imagine, by giving money to those in need, the government would do a great deal towards reactivating the economy.

Printing money out of thin air is not as unconventional as it may seem. Ever since the traditional role of gold as the backup reserve for currencies (gold standard) was dropped and replaced by the US dollar, which is a currency backed up by itself, the financial system has operated without reserves. Money is made every single time a new loan is issued. Banks are allowed to create money as they wish, a privilege which gives them enormous and unchallenged power. Time has come for governments to do the same to help families. If my calculations are right, this is not a dream but good monetary policy. Food for thought as 2013 begins.

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