TED@State Street

Michael Metcalfe: We need money for aid. So let’s print it.

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During the financial crisis, the central banks of the United States, United Kingdom and Japan created $3.7 trillion in order to buy assets and encourage investors to do the same. Michael Metcalfe offers a shocking idea: could these same central banks print money to ensure they stay on track with their goals for global aid? Without risking inflation?

- Financial expert
A senior managing director and head of global macro strategy at State Street Global Markets, Michael Metcalfe provides high quality capital flow research. Full bio

Thirteen years ago,
00:12
we set ourselves a goal to end poverty.
00:14
After some success,
00:21
we've hit a big hurdle.
00:23
The aftermath of the financial crisis
00:26
has begun to hit aid payments,
00:29
which have fallen for two consecutive years.
00:32
My question is whether the lessons learned
00:36
from saving the financial system
00:40
can be used to help us overcome that hurdle
00:44
and help millions.
00:48
Can we simply print money for aid?
00:51
"Surely not."
00:58
It's a common reaction.
00:59
(Laughter)
01:01
It's a quick talk.
01:02
Others channel John McEnroe.
01:05
"You cannot be serious!"
01:10
Now, I can't do the accent, but I am serious,
01:12
thanks to these two children,
01:17
who, as you'll learn, are very much at the heart
01:21
of my talk.
01:24
On the left, we have Pia.
01:27
She lives in England.
01:30
She has two loving parents,
01:31
one of whom is standing right here.
01:35
Dorothy, on the right,
01:39
lives in rural Kenya.
01:42
She's one of 13,000 orphans
01:45
and vulnerable children
01:47
who are assisted by a charity that I support.
01:49
I do that because I believe
01:54
that Dorothy, like Pia,
01:57
deserves the best life chances
01:59
that we can afford to give her.
02:03
You'll all agree with me, I'm sure.
02:05
The U.N. agrees too.
02:08
Their overriding aim
02:11
for international aid
02:13
is to strive for a life of dignity for all.
02:15
But -- and here's that hurdle --
02:21
can we afford our aid aspirations?
02:26
History suggests not.
02:30
In 1970, governments set themselves a target
02:34
to increase overseas aid payments
02:39
to 0.7 percent
02:41
of their national income.
02:44
As you can see, a big gap opens up
02:45
between actual aid and that target.
02:50
But then come the Millennium Development Goals,
02:54
eight ambitious targets
02:58
to be met by 2015.
03:01
If I tell you that just one of those targets
03:05
is to eradicate extreme hunger and poverty,
03:08
you get a sense of the ambition.
03:12
There's also been some success.
03:15
The number of people living
03:18
on less than $1.25 a day has halved.
03:20
But a lot remains to be done in two years.
03:26
One in eight remain hungry.
03:29
In the context of this auditorium,
03:33
the front two rows aren't going to get any food.
03:36
We can't settle for that,
03:40
which is why the concern about the eighth goal,
03:42
which relates to funding,
03:47
which I said at the beginning is falling,
03:49
is so troubling.
03:51
So what can be done?
03:56
Well, I work in financial markets,
03:58
not development.
04:01
I study the behavior of investors,
04:03
how they react to policy and the economy.
04:06
It gives me a different angle on the aid issue.
04:12
But it took an innocent question
04:17
from my then-four-year-old daughter
04:19
to make me appreciate that.
04:22
Pia and I were on the way to a local cafe
04:26
and we passed a man collecting for charity.
04:29
I didn't have any change to give him,
04:33
and she was disappointed.
04:35
Once in the cafe, Pia takes out her coloring book
04:38
and starts scribbling.
04:41
After a little while, I ask her what she's doing,
04:43
and she shows me a drawing
04:47
of a £5 note
04:50
to give to the man outside.
04:52
It's so sweet,
04:54
and more generous than Dad would have been.
04:55
But of course I explained to her,
04:58
"You can't do that; it's not allowed."
05:00
To which I get the classic four-year-old response:
05:03
"Why not?"
05:07
Now I'm excited, because I actually think
05:10
I can answer this time.
05:12
So I launch into an explanation of how
05:14
an unlimited supply of money
05:17
chasing a limited number of goods
05:20
sends prices to the moon.
05:24
Something about that exchange stuck with me,
05:30
not because of the look of relief
05:35
on Pia's face when I finally finished,
05:37
but because it related
05:39
to the sanctity of the money supply,
05:44
a sanctity that had been challenged and questioned
05:49
by the reaction of central banks
05:53
to the financial crisis.
05:56
To reassure investors,
05:58
central banks began buying assets
06:01
to try and encourage investors to do the same.
06:06
They funded these purchases
06:11
with money they created themselves.
06:15
The money wasn't actually physically printed.
06:18
It's still sort of locked away
in the banking system today.
06:21
But the amount created was unprecedented.
06:25
Together, the central banks of the U.S.,
06:30
U.K and Japan
06:34
increased the stock of money in their economies
06:36
by 3.7 trillion dollars.
06:39
That's three times, in fact
that's more than three times,
06:43
the total physical stock of dollar notes in circulation.
06:46
Three times!
06:51
Before the crisis,
06:55
this would have been utterly unthinkable,
06:57
yet it was accepted remarkably quickly.
07:02
The price of gold,
07:10
an asset thought to protect against inflation,
07:12
did jump,
07:15
but investors bought other assets
07:17
that offered little protection from inflation.
07:20
They bought fixed income securities, bonds.
07:23
They bought equities too.
07:26
For all the scare stories,
07:29
the actual actions of investors
07:32
spoke of rapid acceptance and confidence.
07:35
That confidence was based on two pillars.
07:41
The first was that, after years
07:47
of keeping inflation under control,
07:50
central banks were trusted
07:53
to take the money-printing away
07:56
if inflation became a threat.
07:59
Secondly, inflation simply never became a threat.
08:02
As you can see, in the United States,
08:09
inflation for most of this period
08:11
remained below average.
08:13
It was the same elsewhere.
08:16
So how does all this relate to aid?
08:19
Well, this is where Dorothy
08:23
and the Mango Tree charity
08:27
that supports her comes in.
08:29
I was at one of their fundraising events
08:32
earlier this year,
08:34
and I was inspired to give a one-off donation
08:35
when I remembered that my firm
08:39
offers to match the charitable contributions
08:42
its employees make.
08:45
So think of this:
08:48
Instead of just being able to help Dorothy
08:50
and four of her classmates
08:53
to go through secondary school for a few years,
08:55
I was able to double my contribution.
08:58
Brilliant.
09:02
So following that conversation with my daughter,
09:04
and seeing the absence of inflation
09:10
in the face of money-printing,
09:13
and knowing that international aid payments
09:15
were falling at just the wrong time,
09:18
this made me wonder:
09:21
Could we match
09:25
but just on a much grander scale?
09:27
Let's call this scheme "Print Aid."
09:33
And here's how it might work.
09:38
Provided it saw little inflation risk from doing so,
09:40
the central bank would be mandated
09:46
to match the government's overseas aid payments
09:48
up to a certain limit.
09:51
Governments have been aiming to get aid
09:54
to 0.7 percent for years,
09:56
so let's set the limit at half of that,
09:58
0.35 percent of their income.
10:00
So it would work like this: If in a given year
10:05
the government gave 0.2 percent of its income
10:07
to overseas aid,
10:09
the central bank would simply top it up
10:10
with a further 0.2 percent.
10:12
So far so good.
10:15
How risky is this?
10:19
Well, this involves the creation of money
10:21
to buy goods, not assets.
10:26
It sounds more inflationary already, doesn't it.
10:28
But there are two important mitigating factors here.
10:32
The first is that by definition,
10:36
this money printed would be spent overseas.
10:40
So it's not obvious how it leads to inflation
10:45
in the country doing the actual printing
10:49
unless it leads to a currency
depreciation of that country.
10:53
That is unlikely for the second reason:
10:58
the scale of the money that would be printed
11:01
under this scheme.
11:04
So let's think of an example
11:07
where Print Aid was in place
11:10
in the U.S., U.K. and Japan.
11:14
To match the aid payments made
11:18
by those governments over the last four years,
11:20
Print Aid would have generated
11:23
200 billion dollars' worth of extra aid.
11:25
What would that look like
11:30
in the context of the increase in the money stock
11:32
that had already happened in those countries
11:35
to save the financial system?
11:38
Are you read for this?
11:40
You might struggle to see that at the back,
11:43
because the gap is quite small.
11:45
So what we're saying here
11:49
is that we took a $3.7 trillion gamble
11:51
to save our financial systems,
11:54
and you know what, it paid off.
11:57
There was no inflation.
11:59
Are we really saying that it's not worth the risk
12:01
to print an extra 200 billion for aid?
12:05
Would the risks really be that different?
12:09
To me, it's not that clear.
12:11
What is clear is the impact on aid.
12:14
Even though this is the printing
12:17
of just three central banks,
12:19
the global aid that's given
12:21
over this period is up by almost 40 percent.
12:25
Aid as a proportion of national income
12:30
all of a sudden is at a 40-year high.
12:32
Now, we don't get to 0.7 percent.
12:36
Governments are still incentivized to give.
12:39
But you know what, that's the
point of a matching scheme.
12:41
So I think what we've learned
12:46
is that the risks from this money creation scheme
12:50
are quite modest,
12:54
but the benefits
12:57
are potentially huge.
13:00
Imagine what we could do
with 40 percent more funding.
13:02
We might be able to feed the front row.
13:06
The thing that I fear, the only thing that I fear,
13:11
apart from the fact that I've run out of time,
13:13
is that the window of opportunity for this idea
13:15
is a short one.
13:20
Today, money creation by central banks
13:23
is an accepted policy tool.
13:26
That may not always be the case.
13:29
Today there are universally agreed aims
13:32
for international aid.
13:36
That may not always be the case.
13:38
Today might be the only time
13:42
that these two things coincide,
13:44
such that we can afford the aid
13:47
that we've always aspired to give.
13:51
So, can we print money for international aid?
13:55
I seriously believe the question should be,
14:03
why not?
14:07
Thank you very much.
14:09
(Applause)
14:12

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About the Speaker:

Michael Metcalfe - Financial expert
A senior managing director and head of global macro strategy at State Street Global Markets, Michael Metcalfe provides high quality capital flow research.

Why you should listen

Michael Metcalfe leads State Street Global Markets Macro Strategy team, focusing on how the behavior of investors and online retailers can help with investment decisions. In this role, he regularly consults with many of the world’s largest institutional investors as well as policy makers. He develops tools to help analyze markets, and regularly advises portfolio managers from some of the world’s largest pension and hedge funds.