Forbes list of the top ten recent financial scandals includes Enron, Madoff and Worldcom, not one of which cost a trillion dollars, but interestingly, its list omits the financial chicanery that has ultimately been the most expensive and has harmed United States citizens the most. This is not because Forbes has an inadequate understanding of finance, but it may be because the rest of us do.
We can all understand a corporate executive or money manager who appropriates money either for his own use or to prop up a failing stock or portfolio. But unless the government bails out the wrongdoers (as it randomly does) if we have not invested in the particular asset, we are generally not much affected.
Instead, we have been all been made poorer by the dilution of our money. The so-called economic recovery that seems to be best enjoyed on Wall Street or its environs has been funded by the government ‘printing’ money or as they call it, ‘quantitative easing.’
Money is mostly an entry on a computer somewhere, so in general, the government does not literally print additional cash. The government increases the amount of money in the system by giving it to banks through a convoluted process of borrowing from banks and overpaying for the privilege, or by buying securities with an imaginary checkbook that distributes money and never has to be balanced.
If 2008 taught us nothing else (and from all appearances it taught us nothing) even with low interest rates, people without jobs can not repay loans. Much of the money lent out will never be repaid, and the money loaned adds to the amount of money in circulation. This is actually a fairly direct process since the Fed often buys asset backed securities (essentially a portfolio of loans). Note that this will likely cause problems in the future when the government will be forced to write down the value of the loans.
So how big is this problem? How much money has been infused into the system since 2008? One of the lower estimates is just over $3 trillion. This number comes by comparing the money the Fed held on its balance sheet in assets in 2008, 950 billion, to the amount it holds now, over $4 trillion.
These infusions of money have, among other things, allowed the United States to operate with an enormous deficit. Low interest rates keep the cost of government borrowing down. Further, when the Fed buys government bonds, the sellers of the bonds have more money to invest in new bonds and in stocks and this is partially the reason the stock market has stayed strong. Low interest rates have encouraged spending, a short term economic bonus, but have discouraged saving that is ultimately the source of capital on both a macro and a family level.
The problem for most of us can be thought of most easily with a simple illustration. If I have $100 and the money in the system is $1000 then I own 10% of the wealth. Great for me. But if there is $2000 in the system and I still have $100 then I have only 5% of the wealth. Once there is $200,000 in the system, I am not doing very well. If the system has grown because new businesses have opened and new jobs are available, I will have a chance to grab some of that additional wealth through cost savings or an increase in the demand for my labor. But if the system has grown because the government has ‘made up’ the money and then put it in the hands of a select few, then I am worse off. My $100 buys less. Worse still, the new money is not dispersed evenly throughout society but is concentrated in the hands of the wealthy.
The most dangerous effect of printing money is inflation. The CPI or consumer price index has not been much changed by this new money. But that is because, in general the price of producing goods has come down due to automation and globalization (that is, hiring cheap labor).The prices for food and energy have climbed however, largely because there has been more money available to pay for them. This has been disastrous for countries where wages are extremely low. High food prices like played a role in the Arab Spring and in revolutions in Africa. South America has begun showing signs of weakening governments.
Why has the government continued to print money, especially as the catastrophe of 2008 fades? I am not sure if there is a better reason than that provided by the adage, “the present value of a future problem is zero.”