A prominent economist has a radical proposal for stimulating the economy: just add money to everyone’s bank account. It is crazy enough to work?

It’s not crazy, it’s actually common sense. Take for example, from the article:

Japan, whose public debts are equivalent to about two hundred and forty per cent of G.D.P., is another interesting case. After repeated rounds of quantitative easing, the Bank of Japan, the country’s central bank, now owns about a fifth of this debt. Like the Fed, it currently insists that it will eventually sell its bond portfolio back to private investors, and the Japanese Treasury Department says it intends to repay all its debts. But Turner points out another possibility. Since one arm of the Japanese government is effectively lending to another arm, the public debt owned by the central bank could simply be written off. If that happened, Japan would have created a great deal of money and used it to reduce its debt burden—a form of money finance. And it’s hard to see how this would generate a spike in inflation.

It wouldn’t create inflation because the money’s already been created for the government to buy back its debt from the private sector and the private sector already has the money now and no inflation occurred! Now the Japanese Governnent is holding on to bonds that are money borrowed from itself! Which means they can cancel them out tomorrow with zero effect on inflation.

It’s such common sense and so simple, people just can’t grasp it. They keep insisting that it’s not that simple, but it is. And until we wake up, we will continue to find ourselves doing stupid things like loaning ourselves money to do things and then paying ourselves interest on the money we borrowed from ourselves while telling everyone we owe too much money to… ourselves!

Source: Why Not Just Print More Money? – The New Yorker

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