Many experts say governments and central banks should quickly reverse their fiscal and monetary stimulus to curb debt and prevent a virulent outbreak of inflation.
But Financial Times columnist Martin Wolf begs to differ. He says government spending is necessary to ensure economic recovery and central banks should create the money for that spending.
“If governments need to run deficits, to support demand at a time of private sector weakness, they can always borrow from central banks,” Wolf writes.
“Yes, this is printing money. It is also an insanely radical policy recommended by no less insane a radical than Milton Friedman.”
Friedman’s idea was for the central bank to boost money supply during recessions and shrink it in the recoveries that follow.
So you can have expansionary fiscal and monetary policy at the same time, Wolf argues.
“The neat thing about this proposal is that one does not have to decide whether fiscal policy or monetary policy is doing the heavy lifting: they are two sides of one coin.”
Bottom line, he says: “The argument for aggressive monetary expansion remains strong.”
In the United States, Federal Reserve Chairman Ben Bernanke has said that the economy isn’t growing “fast enough,” but he and his Fed colleagues are reluctant to ease policy further.
That’s because they worry about the negative reactions in financial markets that would likely result, says New York Times columnist David Leonhardt.
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