The world seems to be on fire. A couple of months ago, the economic upswing was still firmly established, production expanded, and unemployment was declining. It all changed with the advent of the coronavirus or, to be precise: things turned really sour with the politically dictated lockdowns.
- Thorsten Polleit
As a reaction to the spread of the virus, governments in many countries ordered shops and firms to shut down and people to stay home. The inevitable result was a close to complete breakdown of the economic system. Hundreds of millions of people were thrown into outright despair; in India alone 120 million workers lost their jobs in April 2020.
The economic collapse sent the unbacked paper money system into a tailspin. Borrowers were unable to service their debt, and banks unwilling to roll over maturing loans, let alone extend new funds to struggling debtors. The entire credit pyramid was about to come crashing down. To prevent this from happening, governments and their central banks went “all in,” providing huge amounts of money to pay for people’s lost incomes and firms’ evaporating profits. Of course, governments do not have the money that they have promised to spend.
Central banks have started running the electronic printing presses, issuing great amounts of newly created money into the banking and financial sector and also injecting new balances into people’s accounts held with banks. In other words: as production contracts heavily, the quantity of money is rising strongly. This is, no doubt, an inflationary policy, for, if anything, inflation must be understood as an increase in the quantity of money. One possible outcome of a policy of increasing the quantity of money is price inflation: the increase in the money prices of goods and services.
Another result of a rise in the money stock is a redistribution of income and wealth among people. Not all people will get a share of the newly created money at the same time, as there will be early receivers and late receivers. The former can buy goods and services at unchanged prices. The latter, however, lose out: they can only purchase vendible items at already elevated prices. As a result, the early receivers of the new money get richer compared to the late receivers. The money injection, therefore, amounts to a redistribution of income and wealth.
The vast amounts of money that central banks are issuing to fend off the symptoms of the crisis will create winners and losers. It will make some richer, and it will make many others poorer. It does not create a win-win situation. Banks, the financial industry, big business, and governments, as well as their entourages and close beneficiaries, can be expected to be on the winning side. In contrast, medium and small business, the average employee, and pensioners can be expected to be on the losing end. If anything, the printing of ever greater amounts of money increases economic inequality.
It is no longer hard work, ingenuity, frugality, and consumer orientation on the part of the individual that determines his economic fate, but closeness to the central bank’s money printing press and meeting the requirements for receiving government favors. In times of economic expansion, opposition and protest against the social injustice that comes with money printing are subdued—most people see their slice of the cake increasing at least to some extent. A recession, however, changes that: it lays the foundation for outright opposition and rebellion. …