Monetary Finance Explained | the Latest Addition to the Monetary Policy Toolkit

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The United Kingdom turned to monetary finance for its Coronacrisis spending. This is different from the standard Quantitative Easing approach. So, what exactly is monetary finance? Why has the UK started using it? And will it lead to inflation or even hyperinflation?

Narrated and produced by Dr. Joeri Schasfoort (University of Cape Town)

If this topic has peaked your interest and you would like to know more about it. I've suggested some excellent readings below:

* Between Debt and the Devil by Adair Turner, great book on money and debt by one of the most prominent proponents of monetary finance.

Extended description:

Monetary finance is the latest addition to the monetary policy toolkit of central banks. It is closely related to money printing and quantitative easing, but not quite the same. Theoretically monetary financing is much more efficient than letting the government borrow via the bond market to finance its fiscal policy spending. So why not do it all the time? Well this brings us to the problem with monetary financing. And that is not about doing it per se but more about is about doing it too much.

The problem is that it is too easy. Hence, it might tempt governments to do this too much. So much so that excess money creation will increase demand for goods and services while supply cannot keep up. That is when price start to skyrocket. This is why hyperinflation happened in Zimbabwe and Venezuela when the government started printing money to finance government expenditures.

However, central bankers have told us that this is just a temporary measure and they hope that investors believe them.

But, do we believe them?

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Hi Dr Joeri. I live in the UK and I'm currently making crucial decisions about how to invest my entire life savings to ensure my continuing financial independence. I've recently been undergoing an extremely steep learning curve involving all aspects of markets and various investment and trading strategies. I've discovered for myself the necessity of understanding macro-economic factors in making good investment decisions within the severe limitations of being a retail investor. Your videos have been incredibly valuable to me and I find them to be the most balanced and concise examples on the subject that I've encountered. They have helped me filter out much of the cognitive noise I encounter while seeking reliable information. Thanks for all your efforts, it really does make a difference.

harry.spekeup

So the key difference is the government, rather than auctioning off bonds to the bond market, sells its bonds to the central bank.

In theory this will not increase inflation in the long run because the government must eventually take money out of the economy with taxes to pay the central bank back with some interest for the debt.

This will clearly lead to inflation until the bonds are bought back. Where that inflation occurs and by how much just depends on what the government spends, how much it borrows, and how fast that spent money disseminates through the economy.

MUSTASCHO

“Getting something for little to nothing.” Sounds like a winning plan.

thAndYorkAve

hi, thank you for this video. is there any data to suggest (esp in the US) that primary dealers purchase the securities knowing that the central bank will buy it from them anyway? if so, isn't that essentially monetary financing, just with an additional step?

simonaskin

Wait I’m still confused how banks can create money to buy bonds? So that means that commercial banks fund the government? The only limit is based on how many bonds the government issues? WTF.

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