To my article dated March 20th on FIRSTonline (“Growth doesn't come from deficits”), some objected that I wouldn't count on the possibility of deficits being monetized. In this sense, the so-called HelicopterMoney by Milton Friedman, in which the central bank "gives away banknotes" to the population and thus achieves an increase in purchasing power and aggregate demand.
The HM theory had never been taken into great consideration by economists, because it was assumed that an increase in the amount of money in circulation corresponded to an increase in the price level – an effect considered undesirable. Today however it is seriously discussed because demand is depressed and inflation is fearless, indeed it is considered desirable. Hence the idea that we can achieve what I call the "impossible dream", that is, running more deficit today without paying the bill tomorrow. Monetization has become the goose that lays the golden egg that disproves the sad science: the famous free lunch really exists, the Blance bond it is a bizarre invention of orthodox economists, who have made it a taboo by inscribing it in the Maastricht treaty.
The simple answer to this merry—that is, not sad—company of heterodox is that monetization sooner or later breeds inflation, and inflation is a tax on money holders. The matter is quite obvious in cases where there is no shortage of aggregate demand, as in post-war hyperinflations or in XNUMXs Italy. When, on the other hand, the question is depressed, the monetization it produces positive effects – lightening the debt burden and providing support to final demand – only if it is and is perceived as permanent and therefore if it generates inflation in the future, thus taking the form of a deferred tax on money holders. The argument, developed in a now extensive literature (see here Bruegel, Krugman e Buiter) is simple: with interest rates close to zero, the advantage of being financed with money rather than with securities is very modest (if not zero), unless the monetization is permanent, in the sense that the central bank renews public securities forever in expiration.
In this case, the State can finance itself at zero interest not only today but forever, even when the conditions of the economy e interest rates they return to normal. But at this point the greater amount of money in circulation produces the inflation tax I mentioned above. Moreover, monetization has no effect on aggregate demand when it fails to reduce nominal interest rates because these are already at a minimum. However, it can reduce real interest rates if, perceived as permanent, it produces an increase in expected inflation. In any case, there is one fact from which we cannot escape: sooner or later we pay the tax.
