Forced into record spending by the threat of another Great Depression, policy makers are blurring the lines between borrowing the money they need and simply creating it.Most modern economies have tried to keep the two activities as separate as possible. The typical setup has been for elected politicians to take charge of budgets, and meet any shortfall by borrowing on bond markets –- while the money-printing machinery was walled off in another branch of government, the central bank.But those barriers began to look porous after the financial crisis of 2008. And in the coronavirus slump, they’ve all but disappeared.
With entire industries shuttered and unemployment soaring, only public spending is keeping millions of households and businesses afloat. The governments on the hook for this relief effort are running up some of history’s biggest budget deficits. And they’re paying at least some of the bills with what are effectively loans from their own central banks –- debt that can be rolled over indefinitely, and is really more like money.
“We’ve had a merger of monetary and fiscal policy,” says Paul McCulley, the former chief economist at Pacific Investment Management Co. “We’ve broken down the church-and-state separation between the two.”
“We haven’t had a declaration to that effect,” says McCulley, who now teaches at Georgetown University. “But it would be surprising if you had a declaration — you just do it.”In the U.S., the Federal Reserve is set to buy $3.5 trillion of bonds this year, according to Bloomberg Economics estimates. Most of that will be Treasuries, covering the best part of a fiscal shortfall forecast to reach at least $3.7 trillion. Nobody knows when the debt will be offloaded from the public balance sheet into the hands of private investors, if it ever is.Similar stories are playing out across developed economies from Europe to Japan — and even in some emerging markets, with Indonesia and Poland joining the fray.
The labor market, it will come as a surprise to nobody, is imploding.
The Fed will be out of bullets. Deficit spending will slow growth rather than stimulate it because the unprecedented level of debt will cause Americans to expect higher taxes, inflation or both.
— Lakshman Achuthan (@businesscycle) May 15, 2020
US COMMERCE APR RETAIL SALES -16.4%; CONSENSUS -12.3% pic.twitter.com/KriWPlntMi
— *Walter Bloomberg (@DeItaOne) May 15, 2020
The US #industrial production 11.2% plunge in April was the worst on record with data going back over a century !
That means the plunge in industrial activity was worst than in any month during the Great Depression ! pic.twitter.com/XpSmb9ykQE
— Gregory Daco (@GregDaco) May 15, 2020