Breaking The Taboo on Monetizing Deficits
In a very long and fascinating speech which has been amplified by Martin Wolf in the FT, Lord Adair Turner seeks to break the taboo on discussion of the potential ability of central banks to monetize fiscal deficits. His argument boils down to a political economic one … Some monetization might be useful in certain circumstances such as in Japan over the recent past, but there is a clear danger of going too far and stoking inflation if the central bank becomes too subject to political pressures.
He makes the interesting point that QE in the US and the UK may ex post amount to monetization of deficits since there is no technical reason why central bank purchases of bonds to lower interest rates need to be fully reversed, and since income from those bonds created through newly created money is being transferred to governments.
I was reminded that Friedman used to argue that all deficits should be financed through base money.