The Menace of Fiscal QE: Can Governments Afford Their Own Generosity?

Over the past decade, we have witnessed unprecedented monetary policy measures taken by central banks worldwide to stimulate economic growth. In the aftermath of the global financial crisis, quantitative easing (QE) became the savior of economies grappling with sluggish growth and high unemployment rates. But as governments grapple with mounting debt and an increasing reliance on fiscal stimulus, a new concern looms on the horizon - the menace of fiscal QE.

What is Fiscal QE?

Fiscal QE, also known as monetized deficit financing, is a policy tool employed by governments to finance their spending by creating money through their central banks. Unlike traditional QE, which involves central bank purchases of financial assets, fiscal QE involves direct financing of government deficits by creating new money. By bypassing the banking system, governments have the ability to fund their expenditures without relying on taxation or borrowing from the markets.

The allure of fiscal QE is undeniable. Governments can seemingly finance social programs, infrastructure projects, or even wage hikes without worrying about the immediate consequences of ballooning debt. It offers the promise of a quick fix to stimulate economic growth and address social inequalities. However, the long-term ramifications of fiscal QE warrant serious consideration.

The Menace of Fiscal QE

by George Selgin (Kindle Edition)

4.5 out of 5

Language	:	English
File size	:	736 KB
Text-to-Speech	:	Enabled
Screen Reader	:	Supported
Enhanced typesetting	:	Enabled
X-Ray	:	Enabled
Word Wise	:	Enabled
Print length	:	126 pages

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The Inflationary Time Bomb

The fundamental concern surrounding fiscal QE is the potential for runaway inflation. By creating money out of thin air, governments risk devaluing their currency and eroding the purchasing power of their citizens. An excessive increase in the money supply can lead to a surge in demand, without a corresponding increase in the production of goods and services. This mismatch can ignite inflationary pressures, driving up prices and imposing a heavy burden on households.

Furthermore, when inflation sets in, it becomes increasingly difficult for central banks to regain control of monetary policy. Interest rates rise to counter inflation, rendering the cost of borrowing higher for businesses and individuals alike. These higher interest rates stifle investment and consumption, creating a vicious cycle that hampers economic growth and job creation.

The Distributional Consequence

Another consequence of fiscal QE is the exacerbation of social and economic inequalities. While the intent behind fiscal stimulus may be to address income disparities and promote inclusivity, the reality may be far from the intended outcome. The funds pumped into the economy through fiscal QE often find their way into the hands of those who can benefit the most from financial assets, exacerbating the wealth gap.

Moreover, fiscal QE tends to favor established industries or politically influential groups. Instead of encouraging innovation and entrepreneurship, it perpetuates the status quo by channeling funds towards government-backed projects or sectors with existing clout. This not only stifles competition but also hampers long-term economic growth by diverting resources and investment away from productive industries.

The Debt Burden

One of the most significant long-term consequences of fiscal QE is the burden it places on future generations. By financing current expenditures through money creation, governments essentially transfer the cost of their generosity onto future taxpayers. This intergenerational transfer of debt not only restricts the capacity for future governments to spend on essential services but also dampens private sector confidence and investment.

As the debt burden mounts, governments may find it increasingly challenging to service their obligations, leading to higher interest payments and a continued cycle of borrowing. The risk of default or the need for austerity measures looms over economies, further exacerbating social and economic instability.

Caution in Fiscal QE Implementation

While fiscal QE may hold short-term benefits for governments, it is essential to recognize the long-term consequences that can undermine economic stability. Governments must exercise caution when resorting to fiscal QE as a means to finance their spending. A more balanced approach that emphasizes structural reforms, fiscal prudence, and responsible spending is crucial to avoid the menace of fiscal QE.

In , the menace of fiscal QE cannot be ignored. While the promise of immediate economic stimulus and social welfare may seem appealing, the long-term consequences of fiscal QE can be detrimental to economic stability and societal well-being. Governments must weigh the potential risks and exercise prudence in their pursuit of fiscal QE. Only then can we ensure sustainable growth and prosperity for current and future generations.

The Menace of Fiscal QE

by George Selgin (Kindle Edition)

4.5 out of 5

Language	:	English
File size	:	736 KB
Text-to-Speech	:	Enabled
Screen Reader	:	Supported
Enhanced typesetting	:	Enabled
X-Ray	:	Enabled
Word Wise	:	Enabled
Print length	:	126 pages

FREE

“A fascinating critical overview of an idea that is gaining traction left, right, and center.” —Peter Conti-Brown, author of The Power and Independence of the Federal Reserve

As the Federal Reserve struggles to fulfill its mandate in a low interest rate world, it faces another challenge: new threats to its hard-won independence.

Thanks to crisis-era changes to its procedures, the Fed now enjoys practically unlimited powers of quantitative easing (QE): it can buy all the assets it likes while still controlling inflation. So far, QE has only been used to combat recession. But if certain politicians have their way, the Fed may end up using it not for macroeconomic purposes but to finance backdoor spending. That’s The Menace of Fiscal QE.

In his brief but systematic study, George Selgin reviews the fiscal QE movement, shows how it threatens both the Fed’s independence and democratic control of government spending, and counters claims that it offers a low-cost way to finance such spending. Finally, he proposes a way to rule-out fiscal QE without limiting the Fed’s ability to counter slumps.