The ECB’s Policy of Printing Money: An Analysis Without Excessive Inflation

Discussions around monetary policy and inflation often center on the actions of central banks, particularly the European Central Bank (ECB). One such policy, which involves the printing of money to provide loans to national central banks, has been a subject of debate. Critics argue that this policy could lead to an unsustainable level of inflation. However, the economic theories and observed trends suggest otherwise. Let's delve into the nuances of this policy and why it does not lead to an excessive inflation.

The Role of National Money Flows

Firstly, it is important to understand the dynamics of national economies through the lens of money flows. The principle of the balance in the national accounts is captured by the equation T-G - S I M-X, where T-G is government taxes minus government spending, S is savings, I is investment, M is imports, and X is exports. A negative balance of trade (M-X) means that a country needs to increase its imports relative to its exports. To balance this trade deficit, the government must increase its spending (Growth through government spending) or save less (reducing S).

France as an Example

Let's consider a concrete example, using France to illustrate this concept. France has a negative trade balance of 8 billion (M-X -8Bn) and a GDP of 2.8 trillion (GDP 2.8T). To achieve zero growth, the French government must ensure that T-G aligns with M-X, meaning T-G must be 92Bn (8Bn).

However, if France aims for 3% growth, it would need T-G to be significantly higher. Therefore, the government must request EU financial support. Assuming no savings (S-I 0), the government would need to secure additional funding of 92Bn from the EU to meet its economic goals.

The Austrian School Perspective

The Austrian school of economics contends that expanding the money supply typically leads to higher inflation. Yet, productivity growth can mitigate this inflation. If current inflation figures are underestimated, it suggests that without quantitative easing (printing money), there might have been a deflationary boom instead. This is a counterintuitive but salient point when examining the historically low inflation rates despite expansive monetary policies.

Current Economic Trends and Monetary Policy

The effectiveness of the ECB's money-printing policy hinges on how the money is used. For instance, print-driven lending might not be materializing as expected due to several factors. First, the banks might be holding back on reckless lending. Second, the lack of robust investment opportunities might be inhibiting more extensive lending activities. Additionally, the financial institutions of the world, post-2008 and repeated tech bubbles, have become more risk-averse and selective in lending, curbing the potential for inflation due to excess money.

In principle, if the growth in money supply is in tandem with the growth in goods and services produced by the economy, there is no monetary cause for inflation. In practice, the current state of the global economy suggests that this condition is being met. As the economy expands, so does the demand for capital, necessitating a proportionate increase in the money supply.

This analysis aligns with the current economic scenario, where the money supply growth is in line with GDP growth and the increase in goods being produced, thereby eliminating a monetary cause of inflation.

Conclusion

The ECB's policy of printing money to provide loans to national central banks is designed to facilitate economic growth and balance trade deficits. Despite the critiques, the economic theories and observed trends suggest that this policy is unlikely to lead to excessive inflation. The balance of trade, national account equations, and productivity growth all play crucial roles in determining inflation rates.

As we move forward, it is essential to monitor these factors closely to ensure that economic policies are effective and sustainable. The ECB's actions, while necessary in certain economic contexts, must be carefully observed to avoid any unintended consequences.