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by BenoitEssiambre
3298 days ago
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The fiscal side can help but IMO you have to get the monetary policy right first because if fiscal stimulation is attempted and it causes inflation to go up towards target and bad central bankers tighten in response like they have been doing in the eurozone and to a lesser extent in the US, this will counter and undo the benefits of the fiscal efforts and leave countries in debt without much to show for it. If you repeat that a lot you may get
sordidasset's 'collapse of rome type situation'. Once you get the monetary side right, you may not even need government fiscal help at all (though you might still need some of it). |
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What's wrong with central bankers tightening in response to fiscal expansion? From where I'm sitting, central bank tightening seems like exactly what we need. And we can't have it without the fiscal expansion coming first. What do you mean when you say that monetary tightening will "counter and undo" the benefits of fiscal expansion?
The problem with monetary policy that's too expansionary is that it leads to the creation of lots and lots of debt in the private financial sector. And the thing about private debt is that it's WAY less stable than public government debt. As private debt builds up in the economy, the web of interconnected private debt obligations becomes ever-more brittle and susceptible to a chain reaction of defaults bringing down the whole system. See 1929 and 2008.
Fiscal expansion, on the other hand, increases the amount of public debt. This expansion induces a monetary policy tightening response that raises interest rates and reduces the amount of lending in the private economy. You're basically swapping in a more stable form of debt for a less stable form of debt. I'd rather have the stable form of debt.
To put it succinctly, fiscal expansion coupled with monetary tightening helps crowd out what Austrian economists call malinvestment in the private economy.
The "collapse of Rome" outcome is what we get when the federal deficit is too small for too long. It's not the other way around.