MONETIZED FISCAL DEFICITS
It is still only a matter of time before some shock triggers a new recession, possibly followed by a financial crisis, owing to the large build-up of public and private debt globally. Meanwhile, financial markets have been reacting positively to the reduction of global tail risks and a further easing of monetary policy by major central banks, including the U.S. Federal Reserve, the European Central Bank, and the People’s Bank of China. Yet it is still only a matter of time before some shock triggers a new recession, possibly followed by a financial crisis, owing to the large build-up of public and private debt globally. What will policymakers do when that happens? seriously damage his re-election prospects next November. The United Kingdom and the European Union have reached a tentative agreement for a “soft” Brexit, and the U.K. Parliament has taken steps at least to prevent a no-deal departure from the EU. But the saga will continue, most likely with another extension of the Brexit deadline and a general election at some point. Finally, in Argentina, assuming that the new government and the IMF already recognize that they need each other, the threat of mutual assured destruction could lead to a compromise.
One increasingly popular view is that they will find themselves low on ammunition. Budget deficits and public debts are already high around the world, and monetary policy is reaching its limits. Japan, the eurozone, and a few other smaller advanced economies already have negative policy rates, and are still conducting quantitative and credit easing. Even the Fed is cutting rates and implementing a backdoor QE program, through its backstopping of repo (short-term borrowing) markets. But it is naive to think that policymakers would simply allow a wave of “creative destruction” that liquidates every zombie firm, bank, and sovereign entity. They will be under intense political pressure to prevent a full-scale depression and the onset of deflation. If anything, then, another downturn will invite even more “crazy” and unconventional policies than what we’ve seen thus far. In fact, views from across the ideological spectrum are converging on the notion that a semi-permanent monetization of larger fiscal deficits will be unavoidable – and even desirable – in the next downturn. Left-wing proponents of so-called Modern Monetary Theory argue that larger permanent fiscal deficits are sustainable when monetized during periods of economic slack, because there is no risk of runaway inflation. Following this logic, in the U.K., the Labour Party has proposed a “People’s QE,” whereby the central bank would print money to finance direct fiscal transfers to households – rather than to bankers and investors. Others, including mainstream economists such as
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November 2019
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