Money Heist in the Real World: the Risks of Unlimited Printing

In the popular Netflix show “Money Heist”, the titular character of the Profesor orchestrates an elaborate heist of the Spanish Royal Mint in which the robbers steal nothing, opting instead to print themselves hundreds of millions of euros. His reasoning? That banks do it all the time under the guise of a “liquidity injection”.

So what can we take from this slightly jarring truth in terms of the real-world economy and the current COVID-19 financial climate?

Well, firstly, most people involved in finance are well aware of the theoretic consequence of printing too much money: inflation.

There have been countless times that governments have tried to game the economic system by manufacturing money artificially. From the Romans adding increasing amounts of copper to their gold coins, to the ancient Chinese inventing paper money precisely to be able to spend more, they have all ended up the same.

This can lead quite a few people to think that, with most central banks around the world creating massive amounts of cash, we can expect a lot of inflation going forward.

That very well might be the case. But, in a practical sense, the current stimulus spending and asset purchases are not exactly the same as simply printing money.

It’s All About Balance

With everyone relying on computers for everything these days, central banks have gone digital. This means that the vast majority of money isn’t “printed” at all. They just create it as an electronic receipt in a bank account.

Before, central banks were constrained in money creation by the physical limitations of actually having to produce the currency. Now, there truly is no limit to the amount of currency that can be created.

Central banks now focus on balancing the amount of digital and physical currency to keep inflation in line, regardless of how much actual money there is.

It’s a sophisticated process that we don’t really notice until something isn’t working well. Such as in mid-February, when traders became aware of a lack of liquidity to buy assets on the market.

What Does Sterilization Mean?

As long as the supply of money remains balanced with production in the economy, prices remain stable. But, central banks can still engage in money printing to support certain activities.

The trick is to supply money in one area where it’s necessary while withdrawing money in another area where it’s not. We call this “sterilizing”, and they often do it by shifting debt.

In fact, central banks treat all currency as different types of debt. By buying a bond, for example, they put currency into the market.

By then calling in the bond, they remove that currency from the market. Central banks haven’t been “creating” money in their stimulus plans so much as removing debt from the economy in exchange for currency, in an effort to “sterilize” the process.

Does it Work?

The practical side of this is that everyone ends up with a lot of debt. And, as long as everyone can make due on their payments, there’s no problem.

In fact, “printing” massive amounts of money right now is in order to ensure everyone has enough liquidity to pay debts. It’s also to keep the system functioning.

The risk, the one no one dares talk about, is a lack of confidence in being able to pay debt. This would lead to cascading defaults and a massive financial crisis on top of the economic crisis that is afflicting the markets.

This risk is more immediate than the risk of inflation. Inflation we can expect once the economy recovers, and central banks aren’t able to call in debts in order to “sterilize” the money that was “printed” during the recession.

And that is the final risk that printing unlimited money can cause. Humans are managing the process. In most cases very capable, intelligent, and diligent humans. But humans can make mistakes. Or, they can get an exaggerated sense of their ability to control the economy.

In the end, it was a mistaken monetary policy that turned what should have been a short economic crisis into a two-decade Great Depression.