The attached note takes a look at the explosion in money printing now underway by major global central banks, including the RBA.
The key points are as follows:
- Central bank support to ensure the flow of money and credit through economies is an essential part of the global and Australian coronavirus economic rescue.
- This has increasingly involved quantitative easing which entails the printing of money.
- Higher inflation is an obvious risk from money printing, but it’s unlikely to become an issue until economic activity more than fully recovers.
Along with massive fiscal stimulus globally to deal with the impact of coronavirus shutdowns on the economy, the last month or so has also seen massive monetary easing – with the latest being the US Federal Reserve expanding its emergency lending program to $US2.3 trillion. The economic shutdowns are necessary to slow the spread of coronavirus to take pressure off the medical system in order to minimise deaths. And because this will lead to a huge detraction in economic activity – we expect Australia and other developed countries to see a 10 to 15% fall in GDP centred on the current quarter – businesses, jobs and incomes need to be protected as far as possible through a period of hibernation so the economy can return to “normal” as quickly as possible once the shutdown ends. Hence government measures to support businesses, jobs and incomes via wage subsidies, payments to businesses, tax relief, rent relief etc. Such measures add to more than 4% of global GDP and are still rising.
Source: IMF, AMP Capital
In Australia, fiscal stimulus is now up to around 10.5% of GDP and in the US it’s around 7% with more on the way.
However, monetary stimulus is also necessary to take pressure off indebted households and businesses and to ensure the flow of money and credit through the economy. Initially some of the focus was on rate cuts, but rates were already low or around zero, and so increasingly we are seeing quantitative easing (QE) or money printing. But surely this is unnatural – money doesn’t just grow on trees? Some fret this can only lead to hyperinflation. This note looks at what QE is and how it entails printing money, why it’s being used and what the risks are.