Who Creates the Money, and Who Pays the Price?

When people hear that a government or central bank has been “printing money”, they often imagine banknotes rolling off a press. In reality, most money used by households and businesses exists as commercial-bank deposits. When a bank approves a mortgage or business loan, it normally creates a new deposit and an equal amount of private debt. Repayment gradually removes that money. Where the credit goes matters: lending for productive investment can expand supply, while a surge of mortgages competing for existing homes may mainly raise property prices and make housing less affordable. This is asset-price inflation.

Public debt follows a different route. A government normally finances a deficit by issuing bonds. Emergency borrowing can protect jobs and essential services, but it also creates future interest costs. Central banks influence both public and private borrowing by setting interest rates. They may also use quantitative easing, or QE, creating reserves to buy assets such as government bonds. When a bond is bought from a non-bank investor, that investor receives a new bank deposit. This is electronic money creation, although the reserves do not automatically become household spending.

Critics argue that QE and very low rates still change behaviour. Cheap credit supports asset prices, encourages more borrowing and can make large government deficits easier to finance. ZeroHedge presents a forceful version of this case, accusing central banks of encouraging credit booms, protecting government-debt markets and shifting the eventual cost onto the public. On this interpretation, citizens paid first through higher prices and then through higher mortgage and business-financing costs when rates were raised to control inflation.

The defence is substantial. Pandemic closures restricted production, reopening changed demand quickly, and governments decided the scale of emergency spending. Commercial banks chose how much private credit to create. Energy and food prices rose sharply, while Russia’s invasion of Ukraine added another commodity shock. There is also evidence against a mechanical explanation: central banks used major QE after 2008 without causing a comparable surge in consumer prices. Inflation depends on how monetary policy, fiscal spending, bank lending, household demand and the economy’s ability to supply goods interact.

Responsibility also crosses borders. The Federal Reserve, European Central Bank, Bank of England and Bank of Japan influence global borrowing conditions. When they loosen or tighten policy together, the effects travel. The US dollar has an especially powerful role in trade and debt. A stronger dollar can increase the local cost of imported food, fuel, medicine and machinery, while making dollar-denominated debts harder to repay.

Central banks were therefore not the sole cause of the cost-of-living crisis, but neither were they detached firefighters. They helped shape the financial environment before, during and after the shock. The real question is how much responsibility they should carry and whether the benefits and costs of their decisions were shared fairly.