The Gradual Return to Fiscal Dominance
In this excellent article Hinde Capital’s Simon White examines the disturbing rise of “fiscal dominance” i.e. the shift towards greater political interference in central bank policy.
From the article:
“The previous 30 years gave birth to more independent central banks. Governments were happy to allow this as these – as we now know – were the exceptional, NICE (non-inflationary continuous expansion) decades. Governments had little debt so there was no real harm – and indeed perceived benefits – in allowing independent central banks set interest rates to target (principally) inflation.
With the end of the NICE times and many developed governments running large fiscal deficits and alarming debt/GDP ratios, history is stirring, and there is a gradual return to fiscal dominance.”
Fiscal dominance describes the process by which governments are able to strong-arm their central banks into monetising public sector deficits and debt. As Mr White points out, “this is the diametric opposite of ‘monetary dominance’, where the central bank forces the government to cut its primary deficit and stabilise the level of public debt outstanding.”
The rise of fiscal dominance is one of the most disturbing macro trends we see and it is one that has profound implications for all of us.
“Governments will show less – not more – restraint with their budgets. The prospect of higher inflation in the years to come is virtually assured, and the aberration of hyperinflation – which has the unsettling knack of taking root alarmingly fast – is no longer dismissible as the prognostications of fantasists.”