However, this would require allowing inflation to drift far off target, which can cause investors and lenders to question the credibility of the central bank.
The perpetual fear of investors losing confidence in the US Treasury bond as a safe store of value is nonsense rooted in the gold standard. Congress can, and often does, carry out fiscal policy without issuing bonds. Bonds are not a funding mechanism for Congressional appropriations. If anything, the opposite is true and deficit spending “funds” bonds from excess reserves created.
Treasury bonds are nothing more than an asset swap with reserves, distinguished only by their liquidity since we no longer have a gold reserve to defend. Even when we were restricted by the gold standard bonds didn’t “fund” spending, but only made their purchase price non-convertible to give policy space to provision the government with deficit spending and to level out reserves between spending and the collection of taxes.
If a country is hit by a supply-side shock (the 70’s oil crisis could be just one example), then consumer prices will quickly begin to rise. If the central bank were committed to a typical inflation target, then they would raise interest rates until their chosen inflation target dropped back onto target.
Remember stagflation? This would apply to economies functioning under fixed exchange rates or carrying debt denominated in a currency they couldn’t control (Euro?) but has little application to a sovereign fiat currency regime. The natural rate for such a sovereign fiat currency is zero and any manipulation by the CB will always be above that.
Such manipulation also comes with additional reserve creation/fiscal spending in the form of non-discretionary interest payments, so its effectiveness at inflation control is further compromised. A widespread lack of understanding of inflation with a fiat currency often drives the very condition the CB is trying to avoid. Making all things more expensive to purchase with interest manipulation doesn’t solve price problems in individual commodities, which is the only inflation possible with a fiat currency below maximum potential production output.
Commodity shortages and supply chain problems will cause price increases, but lacking those, output will always increase to capture demand prior to raising prices. This can be tinkered with by government allowing monopolies to dominate markets and with patents, but that doesn’t constitute “monetary” inflation which is the only thing a CB can influence. If Congress decided to replace all bridges in America in a single budget the price of concrete, steel, and construction labor would skyrocket, but no manipulation by the CB could prevent that. Other than additional labor demand pressure, little increase would be seen in non-construction related commodities.
Monetary policy has never been afraid to adjust its approach. In the past few decades, monetary policy has advanced from the gold standard to inflation-targeting. Perhaps NGDP targeting is next in the line of monetary approaches.
The next line of monetary approach should be to admit its all but total lack of control of an economy without some coherent fiscal policy from Congress. The CB is supposed to be politically neutral, but that has never been possible in reality. I believe an applicable adage here is the one about how only having a hammer distorts one’s perspective of problems so that they all begin to look like nails.
The US dollar is a public monopoly that only Congress can create. Banks create credit accounts, but those require high power public money to retire and they cannot be net saved to store value. Only sustained growth sufficient to roll over private sector debt allows the illusion of it being money to be perpetuated. Widening the gap between private debt and the ability to retire it only makes the economy vulnerable to minor hiccups in GDP growth, and only Congress can narrow that gap with deficit spending.
I’m sure if our nation’s founders could have foreseen the degradation of the aggregate intellect of Congress they might have not handed them all of the keys to the creation of currency, but they couldn’t have, so they did. In the net accounting, the national debt is nothing more than the total of public money in circulation represented by Treasury bonds, not a mortgage on taxpayers or their prodigy. Money created by Congress becomes someone’s assets in the private sector to retire private debt and store value. Congress “pays for” what it deems necessary by its votes, not with taxes or borrowing. Taxes are destroyed by the debt created along with the currency in our double entry spreadsheet accounting system and cannot “pay for” anything once destroyed (-1+1=0). All spending by the federal government represents new currency creation.
With the politicization of the word debt as a bad thing, not understanding that it only refers to tax credit owed to holders of the currency, or anything about sectoral balances, the ignorance of our leadership is ripping the nation apart and causing unnecessary misery. Spending on the public purpose is not “socialism” or in any way inflationary, it is the “purpose” of a government. With the ability to “afford” anything that is for sale denominated in the currency Congress creates at will. “ANY” misery in this economy is totally a political decision, not a coherent economic policy.
