Should Governments Actually Be Reducing Currency Supply?

in money •  7 days ago 

As the virus takes its toll on the world economy governments are looking towards a range of tools to try and keep the worlds economic system afloat or rather pretend to with the tools they have at their disposal. At the moment governments and central banks are looking at taking drastic measures such as:

Cutting interest rates

In many countries around the world, central banks are either going to closer to zero interest rates, having zero interest rates or even negative interest rates to make it appealing for people to take loans and then hopefully do something productive with the money.

The problem with this cheap access to money is that it devalues money and only allows for asset prices like homes to be pumped up in the process and does very little for the real economy.

Banking holidays

While banking holidays sound great, people having the ability to delay their loan repayments does not mean that the loan goes away or the interest on them, it's only kicking the can down the road and with currency inflation only makes it harder to service that debt.

Infinite money printing

The core tool for saving the economy is known as quantitative easing, it was done in 2008 with 16 Trillion Dollars, this time around it looks like it could go into the 100s of Trillions to provide a floor for this overleveraged and underproductive economy.

Money is going to be pumped into the system and sloshed around hoping it finds itself moving into the areas where it's needed but in doing so we could see hyperinflation around the world as more money is dumped into the system.

Image source: - thebalance.com

A scarcity shortage

The problem with throwing money at the issue this time is there will be a production and scarcity shortage and supply chains won't be able to support demand. The more money you throw at the issue the more it costs and the money value diminishes in the return it can give you and prices skyrocket.

Reducing currency supply

It may sound counter-intuitive but could the shrinking of the economy and driving straight into deflation headfirst be the solution to our problems? Either way, it's not going to be pretty but here is my thinking. Should governments and central banks actively look to reduce the currency supply it gives the currency we already have more buying power and keeps prices stable.

It also forces savings that have been locked up or hoarded to be liquidated and bringing asset prices down but in turn that liquidity is then used for production instead of paper wealth.

Reducing the supply also rewards savers and low-income workers without having to provide them with increases as their buying power increases. This reduction in money will also see interest rates increase as banks are looking to secure cash from people for their operations and paying a more favourable return.

Shrinking the money supply also puts less strain on tax revenues as government can do more with their percentage allocation of national revenue and with this can hopefully increase production to start eating away at the deficits through future taxation at a healthier rate.

Reducing the money supply also shrinks the influence of the financial economy, on speculation, derivatives and other financial products which is more of legal gambling than allocating resources effectively.

Reducing their impact as we figure out what to do with the current state of the banking system and allocating capital to production to improve supply chains will help rebuild a stronger economy and trade.

I'm not saying this is a full proof plan, I just think it should be an option on the table for governments to consider.

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Great article, I was not familiar with the term quantitative easing. The graphic helps to understand the concept easily.

Thanks, glad you learned something from it, I think we're all going to get a big lesson in economics whether we like it or not