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Home / Opinion / Columns /  How money-printing turned fashionable

Shaktikanta Das, governor of the Reserve Bank of India (RBI), recently said in the context of cryptos that they “have no underlying [asset]". “Not even a tulip!" In the 17th century, Dutch investors bought tulips, leading to their price skyrocketing. When the bubble burst, many speculators were caught napping. Interestingly, true believers in crypto make a similar argument about fiat money. “What backs fiat money?" “Nothing," is their answer. But this isn’t true. As Gavin Jackson writes in Money in One Lesson, fiat currency gets its value “from the government declaring it has value… It has worth by government fiat."

Hence, the government can create money out of thin air by simply printing it or creating it digitally. Further, money backed by the government is as strong as the government. Also, people at large are more likely to trust a government than some software code, which is what crypto is. This explains why more than 13 years after the first crypto, Bitcoin, was invented, and despite all the money created out of thin air, cryptos haven’t emerged as a medium of exchange that can be used in everyday transactions. Cryptos have become another object of speculation to make a quick buck.

Bitcoin originally emerged as a response to the ability of governments to create money out of thin air. When the financial crisis of 2008 broke out, Western central banks created a lot of fiat money to prevent their respective economies from slipping into a depression and to save financial institutions that were deemed too big to fail. The amount of fiat money that was created in the years following 2008, along with the increased government spending that followed, led many to believe that high inflation was coming. This led to the invention of Bitcoin. It was structured in a way that, unlike fiat money, only a limited amount could be created every year. Also, the rate at which new coins are created keeps falling.

As central banks continued creating money post-2008, the true believers of Bitcoin believed that high inflation was just around the corner. Nonetheless, upward price spirals of the kind that were expected never really happened, at least not until very recently.

While that belief in inflation-to-come led to the popularity of Bitcoin and other cryptos, the lack of it led to the growing popularity of Modern Monetary Theory (MMT). The core argument made by MMT is that the government’s budget should not be looked at like a household budget. As L. Randall Wray writes in Modern Money Theory: “We hear all the time that ‘if I ran my household budget the way that the Federal Government runs its budget, I’d go broke’, followed by the claim ‘therefore, we need to get the government deficit under control’; MMT argues the analogy is false. The government cannot become insolvent in its own currency." This is because “governments are currency issuers", meaning that they can create fiat money out of thin air.

Given this power, governments should not “act like households, trying to balance their budgets" because that would lead to the economy suffering. MMT also suggests that the government should expand spending and become the job guarantor of last resort. Such an employment guarantee is expected to act as an automatic stabilizer when the economy doesn’t do well. This is the core idea behind MMT. In 2022, like cryptos, it is being questioned.

When the covid pandemic broke out, central banks of the rich world decided to follow the 2008 formula, printing $12 trillion this time around, as an estimate made by The Economist suggests. This money printing financed governments, which upped their spending and ran huge budget deficits of the kind rarely seen before. Nonetheless, unlike what happened after 2008, high inflation is now a global phenomenon.

One reason has been a shortage of goods due to pandemic breakdowns of global supply chains. Also, this time governments placed money directly in the hands of people. This hadn’t happened post-2008. With money in their hands, people went about buying goods and services, and this also added to shortages that pushed up prices.

Of course, with high inflation, MMT’s reputation has taken a beating. Though to give Wray and others like him their due, MMT backers did build some nuance into their argument. As Wray writes: “We have argued that persistent government budget deficits… could lead to inflation." This is a point that Stephanie Kelton also makes in The Deficit Myth: “The most important constraint on government spending is inflation."

The trouble is that once an economic theory goes mass market, all nuance goes out. Take the case of John Maynard Keynes. He believed that on an average, the government’s budget should be balanced. This meant that during years of prosperity, governments should run budget surpluses. But if the environment is recessionary, governments should spend more than what they earn.

But over the decades, politicians took one part of Keynes’ argument and ran with it. The idea of running deficits during bad times became permanently etched in their minds. However, they forgot that Keynes had also wanted them to run surpluses during good times. MMT believers are learning this lesson all over again.

Vivek Kaul is the author of ‘Bad Money’.

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