Printing Money to Help the Poor

In much of the Western world, two highly successful economic policy initiatives are coming to an end. Quantitative easing, the creation of money by central banks to purchase financial assets, is likely to have run its course in most countries by the end of 2015. Next year is also the deadline for hitting the United Nations’ Millennium Development Goals—eight ambitious global aid targets, ranging from halving extreme poverty to reducing child mortality and combating HIV.

Both initiatives have changed the world for the better. In the wake of the 2008 financial crisis, quantitative easing reawakened the world economy’s “animal spirits” when nothing else seemed capable of doing so.
The Millennium Development Goals have been described by the UN as the most successful anti-poverty push in history.

That progress, however, is now in jeopardy. In developed countries, a tepid recovery has depressed government spending and soured public attitudes on foreign aid. For the first time since 1997, overseas aid payments have fallen for two consecutive years. Momentum behind funding for the Millennium Development Goals has faltered, just when it should have been building toward the deadlines.

What can be done? My 4-year-old daughter, Pia, gave me an idea. On our way to a local cafe, Pia and I passed a man collecting for charity. I didn’t have any change to give him, and she was disappointed. Once in the cafe, Pia took out her coloring book and drew a £5 note to give to the man outside. I explained to her, “You can’t do that; it’s not allowed.” To which I got the classic 4-year-old response: “Why not?”

Central bankers have long viewed sovereign money creation as a sacred policy tool, to be used sparingly lest it stoke inflation. That sanctity, however, had been challenged by the policy response of choice to the financial crisis: quantitative easing, which has increased the stock of money in the economies of the U.S., the U.K., and Japan by $3.7 trillion, more than three times the total physical stock of dollar notes in circulation worldwide. This raises the question of whether the same strategy used to ward off a global depression might now be deployed to sustain progress toward wiping out extreme poverty around the world. Put another way: Can we simply print money for aid?

Before the financial crisis, the idea of central banks’ creating money to buy assets would have been unthinkable. Yet over the last five years, investors’ reactions have been remarkably sanguine. The price of gold, an asset some argue protects against inflation, did jump, but investors bought other assets that offered little protection from inflation. They bought fixed-income securities and bonds. They bought equities, too. For all the scare stories, the actual actions of investors spoke of rapid acceptance and confidence based on two pillars. The first was that, after years of keeping inflation under control, central banks were trusted to take the money-printing away if inflation became a threat. Second, inflation never did become a threat. Consumer price inflation in the U.S. and elsewhere remained below or close to long-run averages.

This lack of inflation is partly explained by the ongoing weakness of growth. Spare capacity in many industries has kept wages in check, while tepid bank lending has meant the newly created money has not moved around the economy as fast as it could have. The velocity of money has remained low. Nevertheless, the experience of quantitative easing has demonstrated clearly that, under the right economic conditions and with a credible inflation-targeting central bank, the creation of money by sovereigns can be an effective policy tool to fight disinflation.

In fact, this was one of the few points of economic policy that both John Maynard Keynes and Milton Friedman agreed on more than 75 years ago. But that’s been long forgotten because of a plethora of mismanaged money-printing schemes that have led to hyperinflation in several countries.

So how could this relate to aid? Consider the following: Many corporations run programs whereby they’ll match employees’ charitable donations up to a certain amount. Some governments have offered similar matching contributions for their citizens for specific appeals. In late 2013 the British government matched the first £5 million donated by the public for typhoon relief in the Philippines. Could we take this up one more level? Could, for example, the Federal Reserve, the U.S. government’s banker, match Congress’s overseas aid contributions, up to a certain level, by printing money?

By Michael Metcalfe - Head of cross-asset strategy at State Street Global Markets.

Bloomberg Businessweek 2014