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

59,415 views ・ 2014-02-26

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