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More on the move to a consolidated fiscal and monetary policy

The weekly post on Monday was on the new Japanese LDP Prime Minister Abe’s threat to strip the Bank of Japan of its independence as a central bank. The thrust of his threat goes to  the integration of monetary and fiscal policy to create a consolidated government balance sheet so that government can better serve its policy aims.

Tim Duy has a good post on this issue that I highly recommend. And the big idea that Tim has here is that it is fiscal policy that is king here. As I have been saying for some time now, tight fiscal and loose monetary leads to recession. Fiscal will always win in a debt deflationary or deleveraging environment. The problem for policy makers is that fiscal and monetary policy are not necessarily completely aligned. And so those who are looking to push the envelop on government stimulus and economic support will always favour a consolidated balance sheet approach.

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I agree this is a new era of central banking, one of less independence and less concern about inflation targets. But, let’s remember that monetary policy is still king. No one in Europe is talking about fiscal as a saviour. And in the US, monetary policy is still driving the stimulus train while fiscal policy is being reined in – to the point of creating recession. So I see this as a massive shift in central banking and monetary policy toward a model of integration and coordination with fiscal policy. But, as yet, this shift is incomplete. Expansive fiscal policy is still seen as a problem in contrast to expansive monetary problem, which is seen as a solution. And so we are now in a period of loose monetary and tight fiscal. Fiscal will win this battle and that will create more economic weakness, making the move to a coordinated loose monetary and fiscal policy the only move left. Japan is leading the way.

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About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.