Money Supply

To boost demand, why not simply print more money - not loads, i.e. £bns but a few million here and there - and not tell anyone. Thus the government puts the new money into their account and then uses that to pay benefits etc?

Here's what one person said:

The available resources of a country is limited. There is the equal amount of money to be balanced with the amount of resources. Example, a bottle of water cost 1 pound. if too much money printed, it may cost 5 pound to buy a bottle of water.

But if the government printed the money, how would anyone know?

In a short run, the production capacity of a country is fixed, a sudden amount of money flush into market will results an increases in prices of products,which is actually a decrease in the value of money. It can be understand as an increases in income caused Demand pull inflation.

People use credit all the time. If money is printed today then the reduction that would have happened today, doesn't happen. So what's the problem? (Owing to a fall in confidence, spending is down)

Who would know - and why would it matter if they did? For example, the Bank of England, is injecting £75 billion of cash which it hopes commercial (high street) banks will use as a base to increase lending and so reduce the credit crunch.

Where is this money coming from?

What is all this 'quantitative easing'?

FAQS: Quantitative Easing (Source: http://rapidrevision.co.uk/economics-teacher/)

What is quantitative easing? Quantitative easing (QE) its direct purchases of assets by the central bank.

What is an asset? An asset is any item of value. Financial assets include stocks and shares

How does quantitative easing work? The government gives the Bank of England permission to buy a range of assets on the open market using new money created by the bank

How does QE impact on the economy? There are two stages:

1. In buying assets using newly printed money the Bank of England increases the amount of cash in circulation (M0).
2. Commercial banks use the additional cash as a base from which to make new loans ie credit creation. The stock of broad money (M4) increases.

What is credit creation? Credit creation occurs when banks create new bank deposits. This is called the bank lending channel

Outline the credit creation multiplier. Commercial banks use cash as a base to create credit. For example, £100 of new cash can be used to make eg £500 of new loans. This is because customers rarely use cash to settle large debts; they transfer bank deposits.

This means an initial increase in the narrow money supply (M0: cash) gives rise to much bigger increase in the broad money supply (M4: cash and bank deposits), depending on the value of the credit creation multiplier

What has happened to value the credit creation multiplier? The value has fallen because commercial banks are more reluctant to lend to firms and households in recession

Does an increase in money supply necessarily mean an increase in the demand for money? No. Households and firms may opt to postpone borrowing because of low confidence or fear of recession resulting loss of jobs or profit

Here is a brief extract which quantifies the theory:

How do you translate all of this theorising into hard numbers? With difficulty. But assume the goal is to raise nominal GDP by around £150bn - that’s a common estimate for the shortfall in demand in the economy this year. If you think the money multiplier is alive and kicking and all the banks need is a gentle nudge to lend more, you might think that £10bn in bond purchases would be enough to achieve that.

But, if you think the money multiplier is all messed up because of the credit crunch, and a low velocity of money is going to blunt the policy even more, the ratio will move closer to 1 to 1. And the Bank might have to spend upwards of £100bn to get the desired effect.

See QE Day and QE Day (2)