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Why can’t governments print an unlimited amount of money? - Jonathan Smith - YouTube
Channel: TED-Ed
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In March 2020, the COVID-19 pandemic
rocked economies worldwide.
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Millions of people lost their jobs,
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and many businesses struggled to survive
or shut down completely.
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Governments responded with some of the
largest economic relief packages
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in history—
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the United States alone spent
$2.2 trillion on a first round of relief.
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So where did all this money come from?
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Most countries have a central bank
that manages the money supply
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and is independent from the government
to prevent political interference.
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The government can implement many
types of economic policy,
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like decreasing people's taxes
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and creating jobs through public
infrastructure projects,
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but it actually can’t just increase
the money supply.
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The central bank determines how much
money is in circulation at a time.
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So why can’t central banks authorize
the printing of unlimited money
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to help an economy in crisis?
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They could,
but that’s a short-term solution
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that doesn’t necessarily boost
economic growth in the long-term,
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and can actually hurt the economy.
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Why?
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With more money in circulation,
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manufacturers of goods like food,
clothing, and cars
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could respond to demand
simply by raising prices,
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rather than manufacturing
more of these goods
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and creating new jobs in the process.
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This would mean you could no longer buy
as much with the same amount of money—
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a situation known as inflation.
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A little bit of inflation,
about 2% a year,
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is considered a sign of economic health,
but more can quickly derail an economy.
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In recent decades,
central banks have tried an approach
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called quantitative easing
to infuse the economy with cash
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while maintaining a low risk
of severe inflation.
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In this approach,
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a central bank increases cash flow
by purchasing another entity’s bonds.
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Anyone can buy bonds from corporations
or governments.
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When you buy a bond, you’re essentially
loaning money to the company—
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or government— with the promise that
they’ll pay it back later with interest.
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This is why buying bonds is sometimes
referred to as buying debt.
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When an individual buys a bond, they're
using money that's already in circulation.
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But when the central bank buys a bond,
it essentially creates cash,
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supplying money that didn’t exist before
in exchange for bonds.
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Both during the 2008-2009 financial crisis
and again in 2020,
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the United States’ central bank,
the Federal Reserve,
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bought bonds from the US government
called treasury bonds.
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Historically, many people have purchased
these bonds as a safe form of investment,
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knowing the US government will
pay them back with interest.
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In early 2020, the Federal Reserve pledged
to buy unlimited treasury bonds,
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loaning the U.S. government
an unprecedented amount of money—
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cash that the government used
to fund relief efforts
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like stimulus checks
and unemployment benefits.
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This isn’t equivalent
to simply printing money,
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though it may sound similar.
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Because of the way bonds are priced,
by buying so many,
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the Federal Reserve effectively
lowered the return on them,
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which incentivizes other investors
to lend to riskier entities—
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like small and midsize companies—
in order to get a decent return.
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Encouraging lending this way should help
companies of all sizes borrow money
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to funnel into projects and hires,
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boosting the economy over time in addition
to helping the government
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supply people with urgently needed
cash in the short term.
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The Federal Reserve’s pledge to buy
unlimited government debt
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has raised some questions—
and eyebrows.
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In theory, this means the government
could issue more bonds,
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which the central bank would purchase.
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The government could then use the money
from the new bonds
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to pay off the old bonds,
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effectively meaning the government never
pays back its debt to the central bank.
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Citing this and other
theoretical scenarios,
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some economists have raised concerns
that a central bank buying government debt
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is a subversion of a system designed
to protect the economy.
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Others have insisted these measures
are necessary,
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and have so far helped
stabilize economies.
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Though quantitative easing has become
a lot more common in recent years,
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it’s still relatively new, and potential
consequences are still unfolding.
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