We can’t money-print our way out of economic trouble

While some have argued that the printing of money was a valid response to the coronavirus-induced economic crisis, experts have warned that it could trigger a massive economic recession that will send the country into a deep dark whole where no investor would dare go.

According to Peter Bauer, economics professor at the University of Johannesburg, if government printed money to combat the effects of Covid-19 it would cause massive inflation and the value of the Rand would be further weakened compared to other currencies.

“No we should not be printing any money because of inflation pressure, but what we should be doing in theory is to reopen businesses to operate as soon as possible, so that people can go back to work because rent has to be paid,” said Bauer.

He said that the economy was already under severe pressure following the downgrading of the country’s credit rating by Fitch Ratings, Standard and Poor’s, and Moody’s into junk status, which would have a negative impact on investors.

“Already investors are looking at safe places to go and if we print money we will risk plunging our economy down even further by raising inflation,” he said.

Xhanti Payi, who is an economist and head of research at Nascence Advisory and Research, said it was pointless to print money and give it to people when places of production were still closed as a result of the pandemic.

“The main problem that this would create is inflation because the money would not be connected to the production of goods to be sold, therefore what we will see is the rise of prices like we saw during the start of the lockdown when hand sanitizers became expensive,” said Payi.

He said if there was an increase in economic activity and government was printing money to pay for public debt at Eskom or at South African Airways (SAA), then it would be a different scenario.

In a statement issued by the SA Reserve Bank (Sarb) late last month to clarify the issue of printing money, it said that in terms of the Sarb’s legal framework, it was not allowed to lend money directly to government or to print money to finance the government debt.

In an opinion piece last week, economist Christopher Malikane, associate professor in the School of Economics and Finance at Wits University, argued that the incorrect reading of the Sarb Act had severely constrained the Sarb from playing a developmental role in a number of areas, from housing and infrastructure to industrial financing.

“The historical experience with hyper-inflation led many countries to grant central banks instrument independence and to place inflation control as one of their monetary policy mandates. It was found that in situations where there was runaway inflation, governments tended to rely on central banks to print money in order to finance their spending,” Malikane wrote.

Bauer, however, said the problem with increasing the money supply will always boil down to inflation.

“If you have sufficient gold reserves to support the increasing volume of currency (given that the country uses the gold standard) then it’s not really a problem to print more money.

“If, however, the currency is undervalued, and suppose that the money supply was to be increased by printing, it could have long-term consequences for the country in terms of increasing levels of inflation and continued devaluation of a currency,” he said.

Bauer said in some cases where the currency may be overvalued (making exports expensive) then some countries may try reduce the value of the currency by increasing the money supply.

He said different methods can be used, for example buying back Government Bonds, or in worst case, printing. In this case it would create jobs or boost production.

“The problem will ultimately be the challenge of inflation. If the rand is weak, imports such as petrol become expensive, pushing up cost of production… in other words, cost push inflation.

“If the rand stays weak, and production price stays low, we may be able to export more at a lower price, bring money into a country, and improve the exchange rate,” he said.

Bauer said this was not great for investors, if the Rand continued to weaken.

“Instead of printing money, we should consider using the expanded public works program to create jobs, stimulate household incomes through wage distribution, which would be far more effective,” he added.

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