Video: What does it mean to “print money”?
When governments inject massive amounts of cash into the economy, as during the COVID-19 crisis, it’s sometimes said that they’re “printing money.”
This expression is entertaining… but it could be misleading. Here’s what it really means.
When everything is normal, governments generally finance their programs by issuing bonds on the financial markets. Bond buyers are essentially providing cash advances in exchange for a guaranteed return and the assurance that they will recover their capital.
But in some situations this mechanism just isn’t enough. When the need for cash is high but interest rates are very low, the markets may decide to stay on the sidelines, creating a phenomenon known as a “liquidity trap.”
This is when the central banks, such as the Bank of Canada and the U.S. Federal Reserve, pick up the slack by buying large quantities of bonds themselves. By injecting cash into the economy in this way, they seek to encourage investment and spending. Obviously, no banknotes are actually printed. Instead, these institutions pay with settlement balances, a form of money that they alone are entitled to use.
This process is known as quantitative easing. It has proponents who see it as a tool for restarting the economy, as well as detractors who criticize it for artificially stimulating markets and borrowing, and fuelling inflation.
To assess the potential effect on your personal finances, don’t hesitate to contact your mutual fund representative or your financial services professional.
The following sources were used to prepare this video:
Actualis, « Quatre mois après le début de la pandémie, où en sommes-nous ? ».
Banque du Canada, « L’assouplissement quantitatif expliqué ».
Behind the numbers, « Canada joins the QE club: What is quantitative easing and what comes next? ».
Bloomberg, « What a Liquidity Trap Is and Why We’re Looking at One ».
Economics help, « The problem with printing money ».
Investopedia, « Understanding the Effects of Fiscal Deficits on an Economy » ; « Liquidity Trap » ; « Quantitative Easing ».
Money crashers, « What Is Quantitative Easing Explained – Definition, Risks & Effects on the Economy ».
Schroders, « Where next for QE? ».
The Balance, « Explaining Quantitative Easing – QE ».
The Grumpy Economist, « Canadian non-QE ».
Wikipedia, « Liquidity trap ».