Printing Money or Better Not?
Germany's Angela Merkel doesn't want to allow the ECB to print money to finance budget deficits and battle the upcoming recession. The opposition, France by Nicolas Zarkozy, would prefer an ECB that prints money and therefore avoids a recession.
Who is right and who is wrong?
The problem with economics is that it is a social science; it should describe the human behavior of the economic process. In economics, like with almost all sciences, math has taken over; the economic processes are described with formulas that provide limited insight in how the economy works. The mathematical approach gives multiple ambivalence interpretations for the same economic phenomena. Different causes for the same economic phenomenon, like inflation, are possible according to the mathematical approach; so there is confusing how to solve economic issues. Furthermore the approach being used in mathematical economics (econometrics) cannot detect (slow) fundamental changing trends.
Germany experienced in 1922-1923 hyperinflation because money was printed like it was toilet-paper and therefore it became toilet-paper. When welfare is low, and that was the situation in Germany after the first world-war, and you give people money they buy food, cloths and everything else they need. The production cannot handle the strong growth in demand; the result of printing money. The logical consequence is that the prices rise; inflation. So the Germans are afraid that printing money leads to high inflation and then to economic depression with negative consequences like high unemployment, fascism, racism and nationalism. Therefore their opinion is that printing money should be avoided at any cost. Very good reasons.
That is the fear of Angela Merkel. The perspective of Nicolas Zarkozy is different. He sees an economy in or nearby a recession and argues that the economy, and therefore also the finance of the government, will become worse when government spending is further restricted. Economic stimulation by means of higher government spending can prevent an economy to go into recession and prevent further deterioration of budget deficits that would initiate further cuts in spending etc. Very good reasons.
Mathematical economics doesn't give the answer which arguments are valid. Math cannot do the job; only logical economic reasoning can.
Since 1982, when Reagan became president in the USA, the national debt of the United States of America has been rising dramatically; especially during republican administrations. Reagan started stimulating the economy with lowering taxes, increasing government spending and easing (financial) regulations; Reaganomics.
The two wars on terror, Iraq and Afghanistan, are completely financed with debt. Since the Financial Crisis started in 2007 the the Federal Reserve Bank of the United States is “printing” money as never before. Since the Second World War the national debt hasn't been, until now, above 100% of GDP. The interest rate on 10 year government bonds is less then 2% (January 3 2000 6,58%), while the inflation in October 2011 was above 3% (inflation in 2000 was 3,4%).
Analyzing the USA government spending in relation to inflation we must conclude that the strong increase of government spending and the increasing of government debt in the USA did not drive up consumer inflation. How is that possible? The answer is simple and explains the economic reality. The spending/printing of government money went into the pockets of the rich. If you make the wealthy richer they will not consume more. The conclusion must be that the consumer inflation is not affected when money is printed and given to the rich because they already have everything they want!
The monetary policy in the USA is focused on trying to get the economy growing by keeping the interest-rates (prime rate is 0.25%) very low and the money supply high. The philosophy behind this monetary policy is to keep money as cheap and abundant as possible to stimulate new investments; new investments would implicate economic growth and employment. This policy isn't working at all, because it is useless to stimulate investments when there is no market. Consumers don't have the money to spend more; actually they have to decrease consumption to pay back loans. The demand side of the economy is not stimulated; consumers pay 16% on credit-card debt!
The monetary policy in the USA and the United Kingdom, despite that budget deficits soared, demonstrates that such monetary policies do not, in the present economic situation, stimulate the economy to grow and neither increases inflation nor interest-rates. Redeeming, for example Italian loans, will not increase inflation because the investors are not suddenly going to spent all that money or give it to the poor! Actually there is no difference for the real economy whether Italy redeems the loans or the ECB does. These loans concern Italian government over spending from the past!
This argumentation is not valid for future budget deficits, because then new money will flow into the economy that could increase demand and therefore stimulate the economy and/or inflation.
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