“The combination of a massively expanded central bank balance sheet and an unsustainable public debt trajectory is a mix that has the potential to substantially reduce the flexibility of monetary policy,” the economists write. “This mix could induce a bias toward slower exit or easier policy, and be seen as the first step toward fiscal dominance. It could thereby be the cause of longer-term inflation expectations and raise the risk of inflation overall.”
There is no flexibility and it is the direct and proximate consequence of Congress and The Adminstration ignoring the fundamental realities of arithmetic -- specifically, the properties of exponents -- that have led to this.
This is clearly a "CYA" paper from Mishkin and others -- they know what's coming and are very, very interested in making sure they don't hang (at least politically) for it.
As for the conclusion:
“The bottom line is that no matter how strong the commitment of a central bank to an inflation target, fiscal dominance can override it,” the authors of today’s paper warned. “Without long-run fiscal sustainability, no central bank will be able to keep inflation low and stable.”
...
“While fiscal dominance is not an immediate risk, there are important elements in the current makeup of U.S. fiscal and monetary policy that suggest increasing attention will be paid to this risk in the years ahead,” the authors said.
Oh really?
Ok, prove it.
Stop all asset purchases right now and leave the market alone.
Let's see where rates go and what that does to Treasury's financing costs.
My assertion that they're trapped can be falsified. They won't do it, because they know I'm right and was in 2007 and 2008, that they were wrong five years ago, and that their influence is no longer a matter of monetary policy, it is a matter of fiscal necessity -- and cannot be reversed without Congress first shutting off all deficit spending and being willing to pay the interest coupon on the existing debt that already exists.
This means a roughly 50% cut in government spending (ex-interest), a doubling of current collected taxes (not rates; due to lawful avoidance you'd have to raise rates much more than by a factor of two!) or some combination of the two.
The only way we can stop what is rapidly becoming an inevitable fiscal crack-up coupled with or worse, initiated by the inability of the bottom two quintiles' ability to buy basic necessities is to put a stop to this crap right now.
Every day that this continues is another day that the exponential arithmetic compounds and the pain that has to be accepted to get out of the box becomes worse.
We're not far from the point where this debate will become academic and no amount of "reform" or "change" will matter at all.
At that point loss of control by both The Fed and Government become inevitable.
