Has the Debasement of Monetary Policy Led to Massive & Chronic Federal Deficits?

Because monetary policy has been overused and abused in recent decades causing its economic efficacy to diminish, it has forced fiscal authorities to take up the slack by expanding deficit spending.

Politicians receive constant criticism for their tax and spend policies which in the last couple decades have led to massive and chronic federal deficits and to burgeoning federal debt. Although Congressional members and Presidents certainly share some responsibility for runaway fiscal finances, there are several other culprits which are also pressuring the public sector.

The U.S. has faced considerable economic misfortunes during the last 25 years including the 2000 tech wreck, the Great Financial Crisis of 2008-09, and the 2000 Pandemic. Each of these economic storms required the federal government to respond with overwhelming assistance to restore economic health. If crises are large or occur too frequently, it’s difficult for any governmental body charged with emergency economic relief to fully restore public fiscal health in between the storms.

The U.S. economy has also suffered from a significant slowdown in demographic growth in recent decades. Several economies – particularly those which are mature – are battling slower paced economic growth due to a more limited labor pool forcing fiscal authorities to subsidize with deficit spending. Aging demographics has also raised the retirement to worker ratio increasing the size of old-age support programs like social security and Medicare.

Disruptions and displacements caused by rapid technological change in the U.S. economy have also required greater U.S. government assistance for individuals and businesses in need of retraining or retooling.

U.S. involvements in ongoing global conflicts including terrorism, increased need to maintain boarder control, rising public costs associated with climate change and the ongoing fight against drug dependency all have added to governmental fiscal woes. This is hardly an exhaustive list, but it does highlight the extraordinary challenges faced by fiscal authorities during the last couple decades.

One issue, however, which receives very little attention, but which nonetheless may be significantly impacting fiscal policy is monetary policy. Fiscal and monetary policies play different but complementary roles in managing and assisting the U.S. economy. Fiscal authorities via legislation set the rules of economic engagement among private players (i.e., the laws) and also directly impact aggregate economic demand and supply through its tax and spend policies. The impact of monetary authorities is more nuanced. They aim to maintain fairness and stability in the financial sector and influence private sector economic decisions by managing interest rates and liquidity conditions.

Although private sector activities primarily drive the U.S. economic cycle, the joint and interactive impacts of fiscal and monetary policies also augment economic growth, stabilize its inevitable cycles, and act as a buffer with emergency aid during times of economic stress. There is an important balance between these two policies. Neither fiscal nor monetary policy could handle the responsibilities alone. If either monetary or fiscal policy lost its effectiveness, the burden on the other would become considerable. While I can’t prove it, because monetary policy has been overused and abused in recent decades causing its economic efficacy to diminish, I believe this has forced fiscal authorities to take up the slack. That is, as the impact of monetary growth on the economy has decayed, fiscal deficit spending has been obliged to chronically expand in order to keep the economy growing at a respectable pace. An increasingly denigrated or debased monetary policy has potentially caused fiscal authorities to persistently run the largest peace time deficits in post-war history in order to sustain economic growth.