Can’t we just print more money? Yes and no.

The country is in debt, and the economy is slowing down. You’re wondering why the central bank (Federal Reserve) can’t just print more money to make the debt go away. It would be a quick fix, and the perfect restart. Great idea, wrong execution.

If the Fed simply printed more money and introduced it into the economy, the value of the money would go down since it is now more easily available. Now everyone can buy those expensive jet skis. The people who make the jet skis figure that out and decide that since the demand is higher, they can raise prices and enough people will pay those prices. In this way everything in the economy becomes more expensive. This is inflation, also defined as “a general increase in prices and fall in the purchasing value of money.” To respond to this, the Fed decides to print even more money so that things become affordable again, and the cycle continues. Eventually, the economy ends up in a situation of hyperinflation, which is exactly what it sounds like — ”rapid, excessive, and out-of-control general price increases in an economy”. One example of hyperinflation is Venezuela, with an annual inflation rate of 155%, according to the central bank of Venezuela.

So, how can the Federal Reserve help boost the economy? The Fed’s interference via changes in interest rates and cash flow in the economy is referred to as monetary policy. One form of monetary policy that does involve indirectly printing more money to help the economy is “Quantitative Easing,” or QE for short.

According to an article from Forbes, “with QE, a central bank purchases securities in an attempt to reduce interest rates, increase the supply of money and drive more lending to consumers and businesses. The goal is to stimulate economic activity during a financial crisis and keep credit flowing.” So essentially, the Fed would buy bonds from the Government to introduce money into the economy. A bond is defined as a debt security and is issued by the borrower to an investor that buys the bond, or essentially loans money to the borrower. When the government is the bond issuer, it becomes a Treasury Bond. So the Fed buys Treasury bonds, which means it loans the government money. The government introduces this money into the economy through welfare programs, subsidies, etc. The presence of more money in the economy increases liquidity in the financial system, causing people to borrow more money for multiple reasons, for eg, starting a business. When they do this, they increase the number of jobs on the market and increase spending and cash flow.

The Fed buys billions worth of Treasury bonds, which increases the price of these bonds and also reduces the return on these bonds for bondholders. This encourages investors and bondholders to diversify their investments. Investors are now likely to put their money in stocks, essentially funding newer and local businesses and helping the growth of the stock market, which again boosts the economy (it also makes it cheaper for the Treasury to borrow). The chart below should make it easier to understand.

But what makes this system different from simply printing more money? Why does it not cause inflation?

Let’s say your laptop has a value of $1,200. You don’t actually have $1,200 in your bank account, you just have an item that is valued at that much. It is not spendable money. But if the Fed buys that laptop from you with money it printed, you have $1,200. There is no new money, and all the accounts balance out to 0. There is more cash flow in the economy, but not necessarily any “new” money. However if the Fed handed you more money, it would be a different case. It’s the same with the Fed buying bonds, or buyable loans. They don’t just give the government extra money, they exchange it for a bond.

There is always the fear of QE causing inflation due to the principle of more money being introduced into the economy, but according to the Forbes article mentioned earlier, “inflation never materialized in the 2009–2015 period when the Fed implemented QE in response to the financial crisis.”

However, there are other concerns with QE. One of them centers around the fact that the government can avoid paying off its debts forever. It can use the money that it got from the Fed buying its new bonds to pay off its older bonds. However, a counterclaim is that it helps the economy and keeps it stable. It almost feels like a Keynes vs Hayek situation, should the Fed interfere or not? Another concern is with the increasing price of stocks, which already feel exclusive to the rich and powerful. This fuels financial inequality and tends to benefit only those who are usually benefitted when asset prices go up. The Fed is limited in its power to help consumers, since it needs to go through the government to introduce money into the economy effectively.

So while Quantitative Easing is an effective and safer way to introduce money into the economy without simply printing more, it does have its downsides. These downsides almost always affect those that have the most to lose, so the financial inequality can be exacerbated.