Mike Shedlock

Adair Turner, former Chairman of the United Kingdom’s Financial Services Authority, and current member of the UK’s Financial Policy Committee and the House of Lords proposes a need to Rethink the Monetization Taboo.

The Fed’s tapering merely slows the growth of its balance sheet. The authorities would still have to sell $3 trillion of bonds to return to the pre-crisis status quo.

The rarely admitted truth, however, is that there is no need for central banks’ balance sheets to shrink. They could stay permanently larger; and, for some countries, permanently bigger central-bank balance sheets will help reduce public-debt burdens.

If central bank holdings of government debt were converted into non-interest-bearing perpetual obligations, nothing substantive would change, but it would become obvious that some previously issued public debt did not need to be repaid.

This amounts to “helicopter money” after the fact. ...

Permanent monetization of government debts is undoubtedly technically possible. Whether it is desirable depends on the outlook for inflation. Where inflation is returning to target levels, debt monetization could be unnecessarily and dangerously stimulative. Central-bank bond sales, while certainly not inevitable, may be appropriate. But if deflation is the danger, permanent monetization may be the best policy.

Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.