What state of a country's public finances makes it possible to carry out government-financed investment programs on the basis of money printing carried out through direct purchase of Treasury bonds by the national central bank?
I ask because this kind of financing of various government social and economic programs has prevailed since the beginning of the SARS-CoV-2 (Covid-19) coronavirus pandemic in the country where I operate. On the other hand, the indebtedness of the country's public finance system has been growing successively for many years, both in absolute terms and in relative terms expressed in terms of the ratio of budget deficit and public debt to GDP (for several years now). The country's possibility of direct purchase by the national central bank, i.e. the National Bank of Poland, of Treasury-issued government bonds and rollover Treasury bonds during the global financial crisis of 2008. At that time, monetary policy also changed regarding Poland's possible adoption of the euro single currency. Since the adoption of the euro single currency would have entailed the loss of the National Bank of Poland's key functions as a national central bank, i.e. first and foremost the functions of the state bank and the issuing bank, which functions of national monetary policy would have migrated to the European Central Bank. If this were to happen then the government would lose the key instrument of anti-crisis measures it has been using on a historically large scale since the beginning of the SARS-CoV-2 (Covid-19) Coronavirus pandemic, which is the ability to add domestic money and introduce this additional money (without coverage in manufactured products and services) into the economy through the above-mentioned mechanism of direct purchase of Treasury bonds by the central bank, i.e. the National Bank of Poland. Most of this additional money is introduced into the economy extra-budgetarily (it is not included in the annual state budget) through government-controlled public institutions, i.e. Bank Gospodarstwa Krajowego and the Polish Development Fund. Special purpose funds are created in these institutions to finance specific government anti-crisis, pro-development, social and investment programs. When, at the beginning of the SARS-CoV-2 (Covid-19) Coronavirus pandemic, the government decided to use this anti-crisis mechanism then economists independent of the government signaled that the result would be a large increase in inflation which then occurred almost from the beginning of 2021. On the other hand, the state of the country's public finances is taken into account in the development situation at the supranational rating agencies and investment banks. Recently, the cost of servicing public debt began to rise strongly in Poland. At the end of October 2022, the yield on domestic Treasury bonds offered to foreign investors rose to as high as 8-9 percent.
This means raising the financial risks associated with the fiscal policy pursued in recent years and the growing indebtedness of the state finance system.
In view of the above, I address the following question to the esteemed community of researchers and scientists:
What is the state of the country's public finances that makes it possible to implement government-financed investment programs on the basis of money printing carried out through the direct purchase of treasury bonds by the national central bank?
What is your opinion on this issue?
Please answer,
I invite everyone to join the discussion,
Thank you very much,
Warm regards,
Dariusz Prokopowicz
By monetizing debt, the government uses inflation to finance some of its spending. Money-printing—more technically known as monetization or “money-financed fiscal programs”—occurs when the government finances itself by issuing non-interest-bearing liabilities. Those liabilities could be currency or they could be reserves that banks hold at their central bank.
Central banks would purchase those bonds by crediting newly created reserves to the government’s account at the central bank. The government could then use the reserves, which would be a liability of the central bank, to pay for its fiscal programs. Alternatively, the central bank could simply create accounts for the public at the central bank with new money, an idea with growing support.
A country’s capacity for monetization is related to the amount of money (currency plus non-interest-bearing reserves) in its economy. When modeled, a program that costs about 1% of gross domestic product (GDP) that is fully monetized corresponds to about a 10 % increase in the price level. Monetization only works if there is a respected and responsible central bank ready to turn off the taps when inflation threatens to exceed its targets.
Monetization is a powerful and alternative tool that countries with strong, independent central banks can use to finance large rescue programs and pay down existing debt, which is normally done by borrowing (issuing debt) or raising taxes.
With respect to economic history, however, when countries have simply printed money it leads to periods of rising prices — there's too many resources chasing too few goods. Often, this means every day goods become unaffordable for ordinary citizens as the wages they earn quickly become worthless, i.e. printing money by increasing the money supply causes inflationary pressure.
In any case, an increase in economic activity commensurate with the amount of money that is created must follow monetization.
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https://www.investopedia.com/terms/m/monetize.asp#:~:text=Monetization%20literally%20means%20to%20convert,activities%2C%20services%2C%20or%20assets.
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THE FEDERAL RESERVE WILL NOT MONETIZE THE DEBT.
Ben Bernanke
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