When there is more money in circulation, the manufacturers of goods like food, clothing, and cars could respond to demand simply by raising prices. This means you could no longer buy as much with the same amount of money. It is known as inflation. Inflation of about 2% a year is considered a sign of economic health, but more can quickly damage the economy.

Inflation

When the Federal Reserve pledged to buy unlimited government debt, this means the government could just issue more bonds which the central bank would buy. The government could then use the money from the new bonds to pay off the old bonds, meaning the government never pays back its debt. Some economists say that when a central bank buys government debt, it's a subversion of a system designed to protect the economy. Others insist that these measures help stabilise economies.

Concerns over central banks buying government debt

Most countries have a central bank that manages the money supply. It is independent of the government to prevent political interference. The government can implement different types of economic policy, like decreasing taxes, but can't increase the money supply.

The government can't just increase the money supply

The central bank determines how much money is in circulation at a time. They can authorise the printing of unlimited money to help an economy in crisis, but that's a short-term solution. It doesn't necessarily help with economic growth in the long term and can actually hurt the economy.

The central bank 

In recent decades, central banks have tried quantitative easing to infuse the economy with cash while maintaining a low risk of severe inflation. The quantitative easing approach is where a central bank increases cash flow by purchasing another entity's bonds. Anyone can buy bonds from corporations or governments. When you buy a bond, you're really loaning money to the company or government, who will pay it back later with interest.<ul><li>When a person buys a bond, they're using money already in circulation.</li><li>When a central bank buys a bond, it creates cash.</li></ul>

Quantitative easing

During the 2008/9 financial crisis and 2020, the United States' central bank bought unlimited bonds from the U.S. government called treasury bonds, loaning the U.S. government money. The government used the money to fund relief efforts. This isn't the same as printing money. Because of the way bonds are priced, the Federal Reserve effectively lowered the return on them. This incentivises other investors to lend to riskier entities, which should help companies to borrow money to use in projects, growing the economy over time.

Buying bonds from the government

Explore the economic strategy of quantitative easing, where a central bank purchases bonds in order to boost the economy. -- In March 2020, the COVID-19 pandemic rocked economies worldwide. Millions of people lost their jobs, and many businesses struggled to survive or shut down. Governments responded with some of the largest economic relief packages in history— the US alone spent $2.2 trillion on a first round of relief. So where did all this money come from? Jonathan Smith explores the strategy of quantitative easing. Lesson by Jonathan Smith, directed by Serin İnan, Kozmonot Animation Studio. Support Our Non-Profit Mission ---------------------------------------------- Support us on Patreon: http://bit.ly/TEDEdPatreon Check out our merch: http://bit.ly/TEDEDShop ---------------------------------------------- Connect With Us ---------------------------------------------- Sign up for our newsletter: http://bit.ly/TEDEdNewsletter Follow us on Facebook: http://bit.ly/TEDEdFacebook Find us on Twitter: http://bit.ly/TEDEdTwitter Peep us on Instagram: http://bit.ly/TEDEdInstagram ---------------------------------------------- Keep Learning ---------------------------------------------- View full lesson: https://ed.ted.com/lessons/how-do-governments-create-money-out-of-thin-air-jonathan-smith Dig deeper with additional resources: https://ed.ted.com/lessons/how-do-governments-create-money-out-of-thin-air-jonathan-smith#digdeeper Animator's website: https://www.kozmonot.tv ---------------------------------------------- Thank you so much to our patrons for your support! Without you this video would not be possible! Nathan Giusti, Helen Lee, Anthony Benedict, Karthik Balsubramanian, John Hong, Annastasshia Ames, Amy Lopez, Vinh-Thuy Nguyen, Liz Candee, Kathryn Vacha, Ugur Doga Sezgin, Anthony Arcis, Chung Wah Gnapp, Karmi Nguyen, Yelena Baykova, Harshita Jagdish Sahijwani, Nick Johnson, Carlos H. Costa, Roberto Patrick, Les Howard, Jennifer Kurkoski, Ryan B Harvey, Abhishek Bansal, Akinola Emmanuel, Jose Arcadio Valdes Franco, Karl Laius, JY Kang, Heidi Stolt, Alexis Hevia, Christina Salvatore, Karlee Finch, Michael Goldberg, Denise A Pitts, Doug Henry, Kristiyan Bonev, Keven Webb, Mihai Sandu, Deepak Iyer, Javid Gozalov, Kyanta Yap, Rebecca Reineke, William Biersdorf, Patricia Alves Panagides, Valeria Sloan Vasquez, Yvette Mocete, Cyrus Garay, Samuel Barbas, Brighteagle, LadyGeek and Curtis Light.

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Explore the economic strategy of quantitative easing, where a central bank purchases bonds in order to boost the economy.

--

In March 2020, the COVID-19 pandemic rocked economies worldwide. Millions of people lost their jobs, and many businesses struggled to survive or shut down. Governments responded with some of the largest economic relief packages in history— the US alone spent $2.2 trillion on a first round of relief. So where did all this money come from? Jonathan Smith explores the strategy of quantitative easing.

Lesson by Jonathan Smith, directed by Serin İnan, Kozmonot Animation Studio.

Support Our Non-Profit Mission
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Keep Learning
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View full lesson: https://ed.ted.com/lessons/how-do-governments-create-money-out-of-thin-air-jonathan-smith
Dig deeper with additional resources: https://ed.ted.com/lessons/how-do-governments-create-money-out-of-thin-air-jonathan-smith#digdeeper

Animator's website: https://www.kozmonot.tv
----------------------------------------------

Thank you so much to our patrons for your support! Without you this video would not be possible! Nathan Giusti, Helen Lee, Anthony Benedict, Karthik Balsubramanian, John Hong, Annastasshia Ames, Amy Lopez, Vinh-Thuy Nguyen, Liz Candee, Kathryn Vacha, Ugur Doga Sezgin, Anthony Arcis, Chung Wah Gnapp, Karmi Nguyen, Yelena Baykova, Harshita Jagdish Sahijwani, Nick Johnson, Carlos H. Costa, Roberto Patrick, Les Howard, Jennifer Kurkoski, Ryan B Harvey, Abhishek Bansal, Akinola Emmanuel, Jose Arcadio Valdes Franco, Karl Laius, JY Kang, Heidi Stolt, Alexis Hevia, Christina Salvatore, Karlee Finch, Michael Goldberg, Denise A Pitts, Doug Henry, Kristiyan Bonev, Keven Webb, Mihai Sandu, Deepak Iyer, Javid Gozalov, Kyanta Yap, Rebecca Reineke, William Biersdorf, Patricia Alves Panagides, Valeria Sloan Vasquez, Yvette Mocete, Cyrus Garay, Samuel Barbas, Brighteagle, LadyGeek and Curtis Light.

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