In his farewell speech in London, Lord Turner has said that printing money within limits to finance government spending will not lead to inflation and called for intellectual clarity in economic policy.
Turner, however, warned that printing money permanently to pay for government services is always bad.
Turner told the Financial Times: “I accept entirely that this is a very dangerous thing to let out of the bag, that this is a medicine in small quantities but a poison in large quantities but that there exist some circumstances, in which it is appropriate to take that risk.”
Arguing that Germany and Japan should have tried printing money during 1930s and 1990s, Turner said that lack of monetary financing in the early 1930s led to fall in prices, depression and the rise of the Third Reich.
“Is [monetary financing] desperately dangerous because every pound of money financed turns into inflation? Absolutely definitively not. There is no coherent rigorous bit of economics that takes you in that direction,” Turner said.
Turner accepts that more stimulus might lead to higher inflation in the UK as the underlying health of the economy is weak and could not “respond to demand and price signals”.
Monetary financing of deficits involves creation of money by the central bank to finance a deficit permanently without selling government bonds.
Turner further believes that the practice of monetary financing would be more effective than more quantitative easing or a fiscal stimulus.