focused attention, adjustments to the short-term bank rate became, and have remained to this day, an additional instrument for policy intervention. One thing remains constant: the sharp divides that exist among academic economists – particularly opinions voiced upon the relevance ofmacroeconomic interventions. By an overlap between economics and political science, the technical and social interrelationships between fiscal interventions – as undertaken by theUKTreasury under the Chancellor of the Exchequer – and monetary interventions by the Bank of England, raise a kaleidoscope of contentious and ongoing discussions. While the focus of fiscal policy is placed firmly upon taxation and debt, the monetary policy of a central bank revolves around interest rates, where the general aim is to keep inflation within acceptable bounds. That general aim applies in the USA, the UK and the EU. Yet, as an unfortunate legacy of Keynes’s early presentations, there is a tendency, even today, to treat the two areas – fiscal policy and monetary policy – as independent, rather than to recognise their interdependence. This remains true in spite of a longstanding presentation by the International Monetary Fund, which shows how a single structure integrates the incidence of bank credit, central bank money and taxation. It is truly amazing that a false dichotomy – between fiscal policy and monetary policy – remains rooted within mainstream textbook presentations of macroeconomics. When the global financial crisis of 2008 once again raised a threat of widespread bank failures and price deflation, the general policy reaction was to cut short-term interest rates to their ‘lower zero bound’. Thereafter, and in seeking further to boost the economy, ‘quantitative easing’ (which involves cutting long-term interest rates) became the multi-shot panacea. As the Bank of England (and the US Federal Reserve and European Central Bank) purchase more and more Treasury bonds, ever-rising prices entice bondholders to sell. With bond prices rising, bond yields (and longterm interest rates) fall. The knock-on from that exercise is that corporate borrowing becomes commensurately cheaper, which may boost demand. The less attractive side of quantitative easing rests with lower yields to savers, lower pensions for retirees and the distributional impact of rising asset and real estate prices. As quantitative easing reduces private holdings of Treasury bonds (a fiscal manoeuvre), it increases private holdings of Bank of England money (a monetary manoeuvre). With such a balanced joint exercise, the total of new ‘paper’ (bonds/money) in circulation remains constant. Yet the response of governments – to the global financial crisis and now to Covid-19 – in ‘paying for’ crisis measures carries the implication of an ever-rising amount of new ‘paper’ (bonds/money) in the economy. In the finer jargon of economics, this is not ‘quantitative easing’; it is ‘monetary financing’. Western central bankers blanch at that description, not least because of its more familiar association with anti-democratic governance, corruption and mismanagement of the economy, viz. Venezuela and Zimbabwe. Where governments worldwide are similarly now engaged in (hopefully) short-termmeasures to alleviate the consequences of lockdowns, illnesses and deaths, there is a risk that quantitative easing may ‘spook’ financial markets with the fear of entering the danger zone of government insolvency, which is technically possible where, as in the Eurozone, money and bonds are denominated in a common currency. The taxation of income and wealth remains the ultimate means by which any government finances its spending, where the sovereign debt to GDP ratio is a measure of the burden to be faced by future taxpayers. To the fidgety discomfort of many – bank governors, treasury ministers, academics, journalists and Clapham omnibus passengers – the formal representation of fiscal/monetary policy interdependence, underpins an unsophisticated well-worn statement. There is no such thing as a free lunch. Gerry Steele is an Emeritus Reader in the Department of Economics. His expository paper Fiscal and monetary interdependence is published in the journal Economic Affairs. g.steele@lancaster.ac.uk FIFTY FOUR DEGREES | 41
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