Academia de Studii Economice București

Free Money

Răducu Elena-Nicole
Facultatea de cibernetică, statistică și informatică economică
Seria E
Grupa 1024
2022

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 Extract from The economist 31st-july-2020 edition1

Free money

The reason why I chose this article was because I am interested in the global financial
crisis and the way it influences the economy and financial markets. The article makes a financial
analysis of the world crisis caused by the coronavirus pandemic, respectively of how
governments reacted to reduce the effects of the pandemic on the financial market.At first
glance, the title of the article expresses optimism, the phrase ‘free money’ being perceived as
something positive, such as an aid or a subsidy. On the other hand, the subtitle of the article does
not give us a rosy picture of the situation since it warns us that in addition to opportunities there
are also many serious dangers.

The Covid-19 pandemic led to a desperate scramble to enact policies that beforehand
were either unimaginable or heretical, something that happens only once in a generation.

As expected, the author makes a comparison with the 2007-2009 crisis, stating that those
who lead the states and have decision-making power failed to learn from the mistakes of the
past.The economic policy wasn’t thought over, it was not restructured. Then, as now, the crisis
prompted an immediateresponse by governments to avoid a collapse of the financial and banking
systems and limit the economic effects of the credit crunch, namely the decline in lending
activity by financial institutions brought on by a sudden shortage of funds.The decision-makers
were forced to initiate aa rapid recovery.The author does not make an explicit reference
butimpliesthat economic policies also were supposed to ensure that the recovery was durable,
based on sustainable growth and that the 2007-2009 crisis should have been used as a
springboard to accelerate structural shifts towards a stronger, fairer and cleaner economic future.

However, the pandemic crisis was even more profound in marking the start of a new era,
the main goal being to exploit the opportunities and to limit the enormous risks that come from a
supersized level of state intervention in the economy and financial markets.

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https://archive.org/details/the-economist-magazine-31st-july-2020/page/7/mode/2up

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 This new era consists of four defining features. The first one is high scale of today’s
government borrowing and the seemingly limitless potential for yet more.

The International Monetary Fund (IMF) predicts that risk countries will borrow 17% of
their combined gross domestic product (GDP) this year to fund $4.2trn in spending and tax cuts
to keep the economy going, but these things are not done. That’s why in the USA, the Congress
is still debating on another spending package and the European Union has just agreed on a new
stimulus funded by common borrowing crossing a political Rubicon. Even if the austere policy
of the IMF has not changed and the main purpose of this institution is to watch over the financial
security of the member states, some flexibility in approach can be noted.

The second feature is the whirring of the printing presses. The USA, Britain, the euro
countries and Japan central banks have created new reserves of money worth some $3.7trn in
2020. In my opinion this led to paying debts by using a representative part of these savings that
the banks provided.

In this way central banks are tacitly financing the stimulus; the result is that long – term
interest rates stay low even while public debt issuance soars. The issuance of bank money
provided an important source of funds in support of bank lending operations.

The third feature of the new era is the state’s growing role as the capital – allocator – in –
chief. The article clearly explains that in order to see offcredit crunch, the Federal Reserve acting
together with the Treasury, has waded into financial markets by buying up the bonds of at$t,
Apple and even Coca – Cola and lending directly to everyone from bond dealers to non-profit
hospitals.

I think this is an intelligent move for economy and financial markets, together the Federal
Reserve and Treasury are now backstopping 11% of America’s entire stock of business debt.

Being a very well - thought that had good results the rich world governments and central
banks are following the same pattern.

The final feature is also the most important, that is the low inflation. All these measures
taken at the beginning of the health crisis have aimed at maintaining economic stability and,
above all, maintaining a low level of inflation.

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 In my opinion this baits leads to the absence of upward pressure on prices that means
there is no immediate need to slow the growth of central – bank balance – sheets or to raise short
– term interest rates from their floor around zero.

The idea is that low inflation is therefore fundamental reason not to worry about public
debt, which, thanks to accommodative monetary policy, now costs so little to service that it looks
like free money which means cash held by us on deposit on your behalf and not held as part of
accrued dividend and other income, or for settlement of immediate transactions. Cash receipts
become Free Money on the day that they are applied to your account; sale proceeds become Free
Money on the settlement date.

The author of the article says that people should not fool themselves that the role of the
state will magically return to normal once the pandemic passes and the unemployment falls.
From my point of view, the economy and financial markets have a lot to lose after the pandemic
crisis and it will a long time to recover from it, the unemployment reaching to unthinkable rates.
The covid 19 pandemic has led to an increase in unemployment and has affected the global
economy tremendously. This very serious economic impact comes largely not from the
pandemic itself, but from the measures taken around the world to control it, which have ranged
from relatively light restrictions on mobility and public gatherings to complete lockdowns (and
lockdowns) that have brought to a halt in most economic activity. This meant a simultaneous
attack on supply and demand. During lockdowns, people (especially those without formal
employment contracts) are deprived of income and unemployment rises sharply, causing huge
drops in consumer demand, which will continue in the period after the lockdown is lifted. At the
same time, production and distribution are halted for all but essential products and services - and
even for these sectors, supply is severely affected by implementation problems and inadequate
attention to the input-output linkages that enable production and distribution. Previous regional
and global crises have not involved this near cessation of all economic activity. The deadly
combination of both supply and demand crashes is why this time is truly different and must be
treated differently.No further than the year 2022, the effects of this policy of creating financial
facilities were fully seen and the picture of the global economy is rather bleak.

The new era of economics reflects the culmination of long-term trends. Today the bond
market still shows no sign of worrying about long-term inflation and if this turns out right,

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deficits and money-printing may well become the standard tolls of policymaking for decades.
Meanwhile, the central banks’ growing role in financial markets, reflects the stagnation of banks
as intermediaries and the prominence of innovative and risk-hungry shadow banks and capital
markets.

As compared to old times, when commercial banks ruled the roost and central banks
acted as benders of last resort to them, now central banks increasingly have to act like “market
makers of last resort”.

Some opportunities are created by deeper reach across the economy and the state, low
rates make it cheaper for the government to borrow to build new infrastructure, from research
labs to electricity grids, that will boost growth and tackle threats such as pandemic and climate
change.

The impacts of climate change are already being observed and are predicted to become
more pronounced. Extreme climate events, including heat waves, droughts and floods, are
expected to become more frequent and more intense. In Europe, the largest temperature increases
occur in southern Europe and the Arctic region. Precipitation decreases in the south of Europe
and increases in the north/north-west. This determines impacts on natural ecosystems, human
health and water resources. Economic sectors such as forestry, agriculture, tourism and
construction will bear mostly harmful consequences. The agricultural sector in northern Europe
may benefit from a limited rise in temperature.

As far as I am concerned, the investment in electricity grids that will stimulate the growth
and the tackle threats as pandemic and climate change is very important thing globally because it
can protect the word from economic and natural disasters and also one thing to take into
consideration is that as society age, rising spending on health and pensions is inevitable and if
this is so, then all the more reason to embrace them.

All things considered, the new era presents grave risks for economy and financial
markets. The experts consider that if inflation jumps unexpectedly the entire edifice of debt will
shake, as central banks have to raise their policy rates and in turn, pay out vast sums of interest
on the new reserves that they have created to buy bonds. And even if inflation stays low, the new
machinery is vulnerable to capture by lobbyists, unions and cronies.

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 I myself think that if inflation jumps unexpectedly the entire edifice of debt will tremble
and banks will have to raise their policy rate and will have a strong effect on population and not
only, this creating a vulnerable situation for everyone.

The author continues with presenting one of monetarism’s key insights of sprawling
macroeconomic management that leads to infinite opportunities for politicians to play favourites.
Already they are deciding which firms get tax breaks and which workers should be paid by the
state to wait for their old jobs to reappear.

To my mind, I think this is a little biased because of the infinite opportunities for
politicians to play favourites and it should also be taken into consideration the fact that soon
some loans to the private sector will turn sour, that leads to governments to choose which firms
fail. So the question that rises is why not rescue companies, protect absolute jobs and save
investors if the money is free?

Furthermore, it is presented as a recipe for distorted markets, moral hazard and low
growth. The author states the idea that it was for fear of politicians’ myopia was why many
countries delegated power to independent central banks, which wielded a single simple tool that
is interest rates – to manage the economic cycle. The author of the article warns that the effects
of this type of policy, free money, will be painful and difficult to remedy. In other words, the
generosity shown during the pandemic in order to keep the economy running, had a negative
impact in the short term.

I also support this idea of delegating power to independent central banks to manage the
economic cycle.

Although, today interest rates, so close to zero, seem impotent and the monarchs who run
the world’s central banks are becoming rather like servants working as the government’s debt-
management arm.

As a conclusion, each new era of economics confronts a new challenge. This fact is also
seen in history for example in 1930s - the task was to prevent depressions, in the 1970s and early
1980s the holy grail was to end stagflation. Stagflation is an economic phenomenon that no
country globally wants to face. Its mention in the public space has aroused the interest of citizens

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in recent months, with searches for this term increasing. A country can be said to have stagflation
when economic growth is very low or absent, and inflation and unemployment are high. The fact
that we have inflation, which in the case of several economies globally is breaking the records of
the last decades, has brought back into question the possibility that economies will again face
this phenomenon, which hit the United States of America in the 70s.

Today the task of policymakers is to create a framework that allows the business cycle to
be managed and financial crisis to be fought without a politicized takeover of the economy. This
may involve delegating fiscal firepower to technocrats or reforming the financial system to
enable central banks to take interest rates deeply negative, exploiting the revolutionary shift
among consumers away from old – style banking to fintech digital payments.

In other words, the world leaders still focus on cushioning the impact of the pandemic,
although the world is also facing sweeping forces of longer-term change, including those from
the effects of climate change and the digital revolution. The impacts of these forces will
inevitably play out in the balance of payments of individual countries, making structural reforms
and improvements to policy frameworks. The author of the article launches a wake-up call for
policymakers not to make the same mistakes as after the previous crisis and focus on how to
build resilient economies and how to achieve long-term prosperity and inclusive growth.

From my point of view, technology has so much improved in all domains during Covid-
19 pandemic and for this reason the banks should rise to all the technological expectations.

The digital economy is considered to be the fourth industrial revolution, characterized by

the ability to transform economies, jobs and even society as a whole by introducing new
technologies and processes. The digital economy is expected to contribute to social and
economic equalization. At the same time, technology will help increase access to education, jobs
and finance, even if, in the short term, it could lead to the reduction of repetitive and non-value-
added jobs in almost all economic sectors, whether we speak of industry, agriculture or services.
In Romania, we estimate that approximately 60% of existing jobs could be affected by the digital
economy: the main causes are the development of the e-government concept, robotization and
automation in industrial sectors and the transfer of services from the traditional area to the digital

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area. If previous industrial revolutions produced changes lasting several generations, the digital
economy produces significant effects in much shorter durations.

One of Romania's advantages in the transition to the digital economy is a relatively

developed IT sector that contributes slightly more than 5% to GDP formation, but which,
through the accelerated growth trend in the coming years, will reach approximately 10% of GDP,
attracting investments of over 2 billion Euros.

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https://ia601702.us.archive.org/7/items/the-economist-magazine-31st-july-2020/The%20Economist
%20Magazine%2031st%20July%202020.pdf

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