According to Greenspan, the Fed expanded its balance sheet not to boost the economy or to keep inflation moving higher. It was because the Federal government had such large expenditures that it would have ‘crowded out’ private borrowers if the Fed had not increased the size of its balance sheet. Do you think that’s true? Is the Fed directing the economy? Or just reacting to the capital demands of the US government?
I think both things are true. I think Greenspan is right that we are seeing monetization of debt. This is what Frederick Mishkin, the former member of the Federal Reserve board of governors refers to as ‘fiscal dominance.’ Yes, I think Greenspan is right about that but it’s also true that they’re trying to fulfill the dual mandate of price stability and creating jobs. As between the two, the Fed is willing to tolerate higher inflation if they can create more jobs. They don’t talk about ‘fiscal dominance’ and they don’t explicitly say they’re monetizing the debt. In fact they deny that they’re monetizing the debts.
Greenspan’s right. When the credit demands of the Federal government are that great, you either have to accommodate the demands or somebody is going to be crowded out. I think that the result would be deflationary. Governments cannot tolerate deflation. So rather than choose between stimulus from monetary ease and monetization of debt, I think that they are doing both.
- Source Jim Rickards, via Proactive Investor