and Anna Schwartz later estimated that about 15% of the war effort was financed with central-bank money rather than by taxes or with debt which was ever actually repaid. In Japan, where 25 years of large fiscal deficits have been matched by equally large purchases of government bonds by the Bank of Japan, it is also obvious that the central bank’s bond holdings will never be sold: permanent monetary finance has occurred.
That possibility terrifies those who believe that monetary finance must eventually lead to hyperinflation. But such fears are absurd. Friedman famously said that in a deflationary depression, we should scatter dollar bills from a helicopter for people to pick up and spend. Suppose US President Donald Trump ordered just $10-million of such helicopter money: the impact on either real activity or inflation would be minuscule.
But central banks can create costless money by paying zero interest on some commercial-bank reserves, even while paying a positive policy rate at the margin. And while such zero-rate reserves might impose an effective tax on credit creation when economic activity revives, that could be desirable, because it would prevent the initial stimulus from being harmfully multiplied by commercial bank’s future money creation.to monetary finance dissolve.
They may be right: the best policy may be to provide monetary finance while denying the fact. Governments can run large fiscal deficits. Central banks can make these fundable at close to zero rates. And these operations might be reversed if future rates of economic growth and inflation are higher than currently anticipated. If not, they will become permanent. But nobody needs to acknowledge that possibility in advance.