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Fools` Paradise: Creating money out of thin air can halt deflationary cycle and make banks richer
Date 14/04/2011 14:18  Author webmaster  Hits 1100  Language Global
14 APR 2011

By Michael Casey | Irish Times (Increasing money supply can halt deflationary cycle)

ANALYSIS: Leaving the euro is unrealistic but what else could the Central Bank do? Why not print more money and lend it to the Government?

THE IRISH banks are very short of cash and the European Central Bank (ECB) and Irish Central Bank are lending €160 billion to them.

The Irish exchequer is also extremely strapped for cash. One government has collapsed, its replacement is agonising over expenditure cuts and tax hikes and the nation can’t borrow from the capital markets. The International Monetary Fund (IMF) and EU are providing €67.5 billion on condition that they run the country and are also charging a high interest rate.

After the recent stress-testing exercise, we now know that the banks may need an additional injection of €24 billion, bringing the total to somewhere between €70 billion and €100 billion. So why does the Central Bank not simply print more money at least to take some of the pressure off the Government?

Printing money might cause price inflation later on, but in our circumstances would that be so bad? It might encourage consumer spending and it would also inflate away some of the real burden of our present debt. Other countries have done this in extreme situations.

Quantitative easing is a euphemism for printing money and the US authorities, under a responsible president, have no qualms about it. Even the conservative ECB is doing it to some degree, despite tut-tutting from Germany. In any case, when a government borrows abroad (from the markets or the IMF) this borrowing also increases the money supply in the borrowing country (unless offset by other means).

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