How do governments create money out of thin air? - Jonathan Smith
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In March 2020, the COVID-19 pandemic rocked economies worldwide. Millions of people lost their jobs, and many businesses struggled to survive or shut down. Governments responded with some of the largest economic relief packages in history— the US alone spent $2.2 trillion on a first round of relief. So where did all this money come from? Jonathan Smith explores the strategy of quantitative easing.
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All governments aim to keep their economy stable and healthy in order to promote development and growth in the long run. To do this, they are required to spend money which is normally raised through taxes of people and companies. When spending exceeds income raised, governments will issue bonds to raise the required amount. Private investors, companies and central banks all buy this debt in return for an interest rate payment on top of the amount borrowed. A good example of when governments increased their spending to boost the economy was the 2008/09 Financial Crisis.
Most governments have since required large sums of money to engage in a relatively new technique called Quantitative Easing. Since 2009, central banks have bought more and more of their governments debt and have done so by increasing the money supply. There are mixed reviews on the long-term effects quantitative easing will have on the global economy. Some think that we have entered a new era of government intervention and economic policy known as Modern Monetary Theory whilst others think that there could be long-lasting damaging effects of this approach.
Most governments have since required large sums of money to engage in a relatively new technique called Quantitative Easing. Since 2009, central banks have bought more and more of their governments debt and have done so by increasing the money supply. There are mixed reviews on the long-term effects quantitative easing will have on the global economy. Some think that we have entered a new era of government intervention and economic policy known as Modern Monetary Theory whilst others think that there could be long-lasting damaging effects of this approach.
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