03/07/2016 - Jim Rickards On Fiscal Dominance and Financial Repression: Central Bank Capping Interest Rates & Bond Buying To Support Government Spending
“We are now entering a new period of fiscal domination by the Treasury. TheFed will again have to give up control of its balance sheet and interest rate policy to save the U.S. from secular stagnation. The Fed will subordinate its policy independence to fiscal stimulus coordinated by the White House and the Treasury. The implications for you are enormous .. The Fed’s independence is again threatened: not by war, but by secular stagnation .. The central bank money printing and currency wars will not be over soon. Global elites are getting desperate to try something new to stimulate growth. These indications and warnings now are signaling loud and clear that the Fed must again surrender its independence to the big spenders. A new global consensus is emerging from elite voices such as Adair Turner, Larry Summers, Joe Biden and Christine Lagarde. The consensus is that the only solution to stagnation is expanded government spending on critical infrastructure, health care, technology, renewable energy and education. If citizens won’t borrow and spend, the government will! It’s the basic Keynesian idea from the 1930s without the monetarist gloss. More government spending means more government debt. Who will buy these added government bonds? How will the Treasury keep interest rates low enough so that a death spiral of higher deficits and higher rates doesn’t push the Treasury bond market to the point of collapse? The answer is that the Fed and Treasury will reach a new secret accord, just as they did in 1941. Under this new accord, the U.S. government could run larger deficits to finance stimulus-type spending. The Fed will then cap interest rates to keep deficits under control. The popular name for rate caps, and Fed bond buying to support government spending, is ‘helicopter money.’ The technical names are fiscal dominance and financial repression.”
