We need to talk about the economy, but the jargon trips up even our best and brightest. Remember when David Cameron was accused of getting ‘debt’ and ‘deficit’ mixed up?
Another pair of terms that can get confused is ‘fiscal’ and ‘monetary’. Fiscal policy is all about how a government raises and spends money; monetary policy is about the management of the currency – and especially how much of it there is in circulation, which is primarily controlled through interest rates and which has a big influence on inflation.
Being about spending and taxation – i.e. what the government giveth and what it taketh away – fiscal policy tends to be more political than monetary policy. The latter typically goes unnoticed, unless something goes badly wrong. In fact, the whole subject is so esoteric that situations that we ought to be concerned about – such as the impact of persistently low interest rates – fail to excite much debate. Indeed, it suits the politicians to depoliticise the whole issue, handing over key decisions to an ‘independent’ central bank as if some of the most fundamental features of the economic system had nothing to do with them or, by extension, us – the voters.
However, monetary policy is becoming re-politicised. In fact, it’s become the subject (and sometimes the cause) of some of the most radical developments in politics of our time. The most obvious example is the ongoing consequences of the European single currency, which was supposed to be the ultimate in turning over political decisions to the technocrats, but which has unleashed forces that are slowly tearing the EU apart while at the same time driving efforts towards further integration.
Then there’s the debate stirred up by the use of monetary instruments like quantitative easing (QE) – when central banks create money and use it to buy back government bonds and other assets from the market, thus boosting the money supply and reducing the cost of borrowing. As well as being controversial in itself, QE is drawing attention to things that governments would prefer the public not to notice – such as the fact that private banks are allowed to literally create money out of thin air before lending it to us.
Once people start focusing on the weirdness of monetary policy, they start having weird ideas of their own. For instance, there’s the proposed alternative/supplement to QE known as ‘helicopter money‘ i.e. money that is created by the central bank and then dropped directly into consumers’ bank accounts. Then there’s Modern Monetary Theory, which turns conventional economic policy on its head and is gaining influential converts.
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