When Money Printing Stops Working

  1. How we got here
  2. Where we are now (early July 2022)
  3. What can be done
Photo of U.S. Currency and Coins
Photo by Mathieu Turle on Unsplash

How we got here

We have reached the end of an experiment unprecedented in modern American history. Government officials (primarily at the state and local levels) took almost complete control over, among other things, which businesses could open and which could not, which services open businesses could provide and which they could not, and where private citizens were allowed to travel and where they were not.

Recognizing the extreme economic dislocations resulting from such decisions, Congress authorized spending on an unprecedented scale. Vast amounts of money were poured into the economy to keep businesses afloat, make payments to the unemployed (often in excess of their working wages), make expanded payments to parents based on the number of children they could claim as dependents, and dole out “stimulus” checks that covered the vast majority of the population.

In other words, policymakers believed that by “printing money,” it was possible for them to ameliorate the negative economic effects of an almost complete takeover of the lives of ordinary Americans.

Where we are now (early July 2022)

With business and personal restrictions now removed, we can see some results:

  1. Inflation is at a 40-year high
  2. Fewer people are working now than in February 2020
  3. The economy is likely in recession (-1.6% GDP growth in Q1 2022, GDPNow currently forecasting -2.1% in Q2)

Where we might be headed

One of the questions going forward is, how much of a difference will money supply-based interventions make if the economy really slows down?

Velocity of M2 Money Stock
Velocity of M2 Money Stock

Looking at the graph above, we can see how the velocity of money has varied over the past several decades. In our context:

An equation for velocity of money
An equation for velocity of money

The data is telling us that increasing the money supply has yielded increasingly meager economic returns in recent years, especially since the 2007–09 “Great Recession.” In 1997, $1 of money supply purchased $2.19 of goods and services counted in the GDP. Today, $1 of money supply pencils out to only $1.12 of such goods and services. Who is to say that increasing the money supply going forward will have any significant effect on economic growth?

What can be done

When the velocity of money hit its late-90’s peak, the U.S. economy was undergoing a transformation unparalleled in human history. It started becoming obvious that the ways people had been acquiring goods, services, and information, the ways business was done, and even the ways people communicated with each other were monstrously inefficient and could be replaced immediately. Innovation, not easy fiscal and monetary policy, was driving growth and policymakers, for the most part, stayed out of the way.

Of course, the dot-com boom/bubble ended in tears, even though the changes it caused were permanent. The free market that allows real innovation to succeed cannot police the wheeler-dealers and outright conmen who inevitably follow in its wake.

Perhaps the focus of policymakers should be on reigning in excesses much sooner in the business cycle in order to prevent “irrational exuberance” from building in the first place. If asset prices start running up, the punchbowl should be removed quickly to prevent the party from careening out of control. All it will take is someone in Congress, the White House, or the Federal Reserve to call a timeout when things seem to be humming along and then resist the inevitable political backlash and investment community pushback for doing so. Then, just maybe, the wild economic swings of the 21st Century which have prevented too many Americans from achieving financial stability will be relegated to the history books.