In March 2020, the COVID-19 pandemic
rocked economies worldwide.
Millions of people lost their jobs,
and many businesses struggled to survive
or shut down completely.
Governments responded with some of the
largest economic relief packages
in history—
the United States alone spent
$2.2 trillion on a first round of relief.
So where did all this money come from?
Most countries have a central bank
that manages the money supply
and is independent from the government
to prevent political interference.
The government can implement many
types of economic policy,
like decreasing people's taxes
and creating jobs through public
infrastructure projects,
but it actually can’t just increase
the money supply.
The central bank determines how much
money is in circulation at a time.
So why can’t central banks authorize
the printing of unlimited money
to help an economy in crisis?
They could,
but that’s a short-term solution
that doesn’t necessarily boost
economic growth in the long-term,
and can actually hurt the economy.
Why?
With more money in circulation,
manufacturers of goods like food,
clothing, and cars
could respond to demand
simply by raising prices,
rather than manufacturing
more of these goods
and creating new jobs in the process.
This would mean you could no longer buy
as much with the same amount of money—
a situation known as inflation.
A little bit of inflation,
about 2% a year,
is considered a sign of economic health,
but more can quickly derail an economy.
In recent decades,
central banks have tried an approach
called quantitative easing
to infuse the economy with cash
while maintaining a low risk
of severe inflation.
In this approach,
a central bank increases cash flow
by purchasing another entity’s bonds.
Anyone can buy bonds from corporations
or governments.
When you buy a bond, you’re essentially
loaning money to the company—
or government— with the promise that
they’ll pay it back later with interest.
This is why buying bonds is sometimes
referred to as buying debt.
When an individual buys a bond, they're
using money that's already in circulation.
But when the central bank buys a bond,
it essentially creates cash,
supplying money that didn’t exist before
in exchange for bonds.
Both during the 2008-2009 financial crisis
and again in 2020,
the United States’ central bank,
the Federal Reserve,
bought bonds from the US government
called treasury bonds.
Historically, many people have purchased
these bonds as a safe form of investment,
knowing the US government will
pay them back with interest.
In early 2020, the Federal Reserve pledged
to buy unlimited treasury bonds,
loaning the U.S. government
an unprecedented amount of money—
cash that the government used
to fund relief efforts
like stimulus checks
and unemployment benefits.
This isn’t equivalent
to simply printing money,
though it may sound similar.
Because of the way bonds are priced,
by buying so many,
the Federal Reserve effectively
lowered the return on them,
which incentivizes other investors
to lend to riskier entities—
like small and midsize companies—
in order to get a decent return.
Encouraging lending this way should help
companies of all sizes borrow money
to funnel into projects and hires,
boosting the economy over time in addition
to helping the government
supply people with urgently needed
cash in the short term.
The Federal Reserve’s pledge to buy
unlimited government debt
has raised some questions—
and eyebrows.
In theory, this means the government
could issue more bonds,
which the central bank would purchase.
The government could then use the money
from the new bonds
to pay off the old bonds,
effectively meaning the government never
pays back its debt to the central bank.
Citing this and other
theoretical scenarios,
some economists have raised concerns
that a central bank buying government debt
is a subversion of a system designed
to protect the economy.
Others have insisted these measures
are necessary,
and have so far helped
stabilize economies.
Though quantitative easing has become
a lot more common in recent years,
it’s still relatively new, and potential
consequences are still unfolding.