Adair Turner makes the case for “Monetary Finance”

This link takes you to an interesting post by Adair Turner on the limits of “monetary policy” (both conventional and the unconventional negative interest rate variety) and the potential use of “monetary finance”. Turner defines Monetary Finance as running a fiscal deficit (or higher deficit than would otherwise be the case) which is not financed by the issue of interest-bearing debt, but instead financed by an increase in the monetary base (i.e. by increasing the irredeemable non-interest bearing liabilities of the government/central bank.

I am probably over simplifying but, crudely stated, I think this is colloquially referred to as printing money and conventionally deemed to be a bad thing. So it is especially interesting seeing someone who was at the heart of the central banking world making the case. The post strikes a balance between the extremes of :

– there are no limits to what governments want to finance; and

– printing money = hyperinflation = the road to ruin.

I recommend you read his post in full but this extract gives you a flavour of the key message (or at least the one that I took away).

“So, on close inspection, all apparent technical objections to monetary finance dissolve. There is no doubt that monetary finance is technically feasible and that wise fiscal and monetary authorities could choose just the “right” amount.

The crucial issue is whether politicians can be trusted to be wise. Most central bankers are skeptical, and fear that monetary finance, once openly allowed, would become excessive. Indeed, for many, the knowledge that it is possible is a dangerous forbidden fruit which must remain taboo.

They may be right: the best policy may be to provide monetary finance while denying the fact. Governments can run large fiscal deficits. Central banks can make these fundable at close to zero rates. And these operations might be reversed if future rates of economic growth and inflation are higher than currently anticipated. If not, they will become permanent. But nobody needs to acknowledge that possibility in advance.”

I don’t agree with everything he writes but Turner is to my mind one of the more thoughtful commentators on banking, economics and finance. His resume includes being the head of the UK Financial Services Authority during the GFC. A book he wrote in 2015 titled “Between Debt and the Devil: Money, Credit and Fixing Global Finance” is also on my recommended reading list.

Tony (From the Outside)

Author: From the Outside

After working in the Australian banking system for close to four decades, I am taking some time out to write and reflect on what I have learned. My primary area of expertise is bank capital management but this blog aims to offer a bank insider's outside perspective on banking, capital, economics, finance and risk.

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