Since the global outbreak of Covid-19 infection in 2020, it’s the economy which has remained more in news for all the bad reasons than the devastation it caused to the health of the people where it consumed millions of lives.
The pandemic-induced lockdowns brought the engine of economic growth to a grinding halt and massively disrupted the global economic chains. All this led to a severe economic crisis never seen before in this century.
Though the invention of the vaccine against the virus helped to roll the economic cycle back in motion through a sustained recovery mechanism, the Ukraine war derailed the recovery efforts and pushed the global economy back in shambles.
All this has summed up in the steep rise in prices of essential as well as non-essential commodities, including never-seen-before medical inflation, which today remains a major concern for all – governments to the general public.
Precisely, we are enveloped by economic miseries as inflation is proving a tsunami for all economic sectors globally. Now, the focus of central banks and governments across the globe on stopping the inflation to behave as a termite on the economy is inevitable.
There is an interesting scenario which we come across on the sidelines of the continuing economic miseries. As the economic crisis unleashed by the pandemic and the Russia-Ukraine military conflict refuse to die down, the media attention to the deteriorating economic situation has scaled up owing to the adverse impact it has on the common households.
The kind of coverage given to the situation by the media, be it print or electronic, serves as a source of economic lessons where terms like core inflation, depression, recession, generalized inflation, hyperinflation, shrinkflation , stagflation, headline inflation etc. are the most common words frequently used.
As the media with the support of economic experts is unwittingly proving as a knowledge management tool for the commoners to get a glimpse of understanding the complex subject of economics through their reports, it’s the printing of money by central banks across the globe which seems exciting, but is full of dangers if mishandled.
In common man’s understanding, printing of money in a crisis situation, for instance pandemic-induced economic crisis, would help to pay debts, overcome funds shortage and meet other developmental goals as the government would be loaded with huge money to spend. Apparently, printing money seems like a prosperous move.
But, it’s not so.
The rising inflation has already assumed dangerous dimensions and has squeezed the domestic budgets across the geographies. This time the crisis has its base in printing of currencies by various central banks.
Printing of money by central banks across the globe to combat the economic crisis has its own tale. It was during the outbreak of the global economic crisis in 2008, when central banks of even most developed nations took the route of printing fiat money for the fear of slipping into a depression and save the economy from collapsing.
That time, most of the experts dished out their concern of printing fiat money to power the economy to sustain the crisis, and had predicted high inflation. However, the central banks ignored the expert warnings and used this tool of printing currency fearlessly.
Remarkably, the move didn’t trigger the kind of inflation warned by the experts. Interestingly, there were no unusual upward price spirals of the kind that were expected.
Notably, experts in the backdrop of printing money pointed out multiple financial and real estate bubbles across the globe. However, these bubbles didn’t face any pricking during the time.
Encouraged by the move of powering their economies through printing of fiat currency in the aftermath of 2008-economic crisis, central banks across the globe extended the same formula to combat economic crisis when the covid pandemic broke out.
As per the data available and quoted by The Economist, developed (rich) economies printed currencies worth $12 trillion. “This money printing financed governments, which upped their spending and ran huge budget deficits of the kind rarely seen before. Nonetheless, unlike what happened after 2008, high inflation is now a global phenomenon.”
A Financial Times column by chief global strategist at Morgan Stanley on 28 February has mentioned: “Nearly 20% of all dollars in circulation were printed in 2020 alone.”
In fact, now the situation suggests that printing of money in the aftermath of the Covid-19 pandemic further fuelled the financial and real estate bubbles of the 2008-economic crisis. This time the bubbles stand pricked as the extra money printed to keep the economy afloat in the ongoing Covid crisis has been ‘mishandled’.
Why this time printing of fiat money triggered high inflation? If we look at the mechanism of the money printed and utilised in the aftermath of the economic crisis in 2008, we find the government controlled the money for its own use. They didn’t pass it on directly to the households. But in Covid crisis, the money printed by the central governments was directly put in the hands of people, which led to brisk sale of goods and services. This kind of demand not only pushed the prices of the commodities, both essential and non-essential, up, but also created shortages.
In simpler terms, as explained by an acquaintance, who is an economic expert, the money pumped by the governments into the system created hidden consumer demand, which has now exploded. The supply is not able to keep up with the increasing demand and this has been leading to more money chasing the same set of goods and services—in the process, pushing up prices or leading to higher inflation.
Meanwhile, let’s come to our own place. The Reserve Bank of India (RBI) has declared a war on inflation. In its latest policy review, the central bank raised the key policy rate, the repo rate, by another 50 bps to 4.90%. The increase in the repo rate comes in a period little over one month after the Reserve Bank in an off-cycle policy move on May 4 witnessed the rate up by 40 bps.
These back-to-back repo rate hikes in a span of little over one month, the RBI has started showing its focus entirely on the management of inflation, which is the most worrying situation as prices of essential as well as non-essential commodities are spiraling out of hand.
Notably, core inflation has already breached the Reserve Bank’s targeted range of 2%-6%. Currently, it stands at 7.7%.
The concept of printing the currency is basically an act of toying with the idea of helicopter money – a reference to an idea made popular by the American economist Milton Friedman in 1969.
It is an unorthodox monetary policy tool option that is used by central banks to stimulate economies. Here the basic principle is to increase broader economic activity and push the inflation up by putting more money in circulation in the market.
As printing of money to finance the deficit increases inflation and is believed to be an attempt to extract more output in an underperforming economy, it is potentially loaded with huge risks. Historically speaking, we don’t find a sterling history whenever the governments have printed money to finance their deficits.
One of the primary risks associated with helicopter money is that the policy may lead to a significant currency devaluation in the international foreign exchange markets. The currency devaluation would be primarily attributed to the creation of more money.
To conclude, now the war on inflation cannot be overlooked as the bubble stands pricked. However, one important question continues to linger on: Can we attribute the soaring inflation in the country to helicopter money?
(The views are of the author & not the Institution he works for)
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.