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WHAT MATTERS MOST: Consequences of printing money

Dr Clyde Mascoll, mascoll_clyde

WHAT MATTERS MOST: Consequences of printing money

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WE TAKE THE WISDOM of our people, especially the elderly, for granted. As a student in Canada, I sat next to an elderly white woman on a train and she started a conversation with me. I immediately got defensive about how quickly we speak and she said: “Son, most people do not listen well.”

On the weekend, a colleague told me that some gentlemen were discussing last week’s article and an elderly man asked: “If the printing of money has no consequences, why does the Government not print money to finance the entire deficit?” This is wisdom at its best.

Last week, I promised that an article on the consequences of printing money for the Barbados economy will follow. Not surprisingly, the minister of finance is still trying to suggest that the printing of money is not taking place. This is as silly as saying that Barbadians are not taking in oxygen and suggesting that it is some other type of gaseous chemical element.

The Government of Barbados is bankrupt and if it were not able to print money, the economy would have come to a halt. Like a business, the Government has access to an overdraft facility at the Central Bank, as it should. This is likened to the printing of money. It is so called in the economics literature, but it is not literally done.

The problem is that the Barbados Government has found another way to print money, which is done by the Bank of Jamaica, but is refusing to admit of it. However, a major difference is that in Jamaica, both types of printing money have to be approved by parliament.

In the absence of having to come to Parliament for approval, important opportunities to debate the economic circumstances in Barbados are being missed. It is a travesty of justice that such a fundamental way in which the economy is being managed has been changed without the approval of those chosento represent the interests of Barbadians.

The Barbados dollar may be seen as acommodity. When there is an oversupply of acommodity, the value of it falls. The best exampleof this may be observed in a fish market. Those of usold enough to know of the fish sellers who passed through the village, would understand that if his/her fish were not selling, the price was reduced. Thishappens in every fish market. Conversely, when the demand is high, as happens around Good Friday, the price goes up.

The printing of money has the potential to lowerthe value of the Barbados dollar. This is why the governor wrote that “maintaining the value of our currency hinges on crafting fiscal policies that aid in dampening the demand for foreign currency”. In essence, the Barbados dollar is spent and most of itgoes in consuming imported goods and services. The more spending occurs, the greater is the pressure on using foreign exchange.

When the fiscal policies are bad, the Central Bank governor is very aware that the printing of money becomes the single largest threat to the stock of foreign reserves at the bank. Not too long ago, he was preaching about the adequacy of the country’s foreign reserves. So what has changed? The answer is the excessive printing of money. On this matter, it is okay to ignore the minister of finance.

But what makes the printing of money particularly dangerous is that the excess spending of the Government is not associated directly with output that earns revenue. When the Government spends for consumption purposes, it is assumed that it has raised enough taxes to cover the cost of such expenditure. This is precisely why Government’s expenditure is divided broadly into current and capital. The former is associated with consumption while the latter is associated with investment.

The excessive spending on the current account explains the fiscal deficits of the Government that have been written on in this column, repeatedly, for years. The Government is now trapped by: (1) overtaxation; (2) junk bonds in the eyes of sovereign private investors and (3) unprecedented printing of money.

I have encouraged Barbadians to buy the savings bonds because of the very attractive interest rate and the hope that the Government can pay in the future. Given the interest rate on deposits, the chance is worth taking. But, individuals investing their own money are more able to make decisions that are not informed by exhaustive analysis. The same is not true for institutional investors.

• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party advisor on the economy. Email: [email protected]