New US government: free reign for monetary public finance

Janet Yellen's appointment as future US Secretary of the Treasury has met with worldwide acclaim due to her high qualifications, yet the appointment also sends an alarming signal: "As a former FED head, Yellen creates a direct link between the Treasury Department and the Federal Reserve; she will thus become part of a new US strategy with the clear goal of even more closely intertwining monetary and fiscal policy in the future," says Dr. Heinz-Werner Rapp, founder and head of the FERI Cognitive Finance Institute (FCFI). This would clearly move the US towards monetary dilution, in line with the controversial Modern Monetary Theory (MMT).

Blurring the boundaries between monetary and fiscal policy

According to the FERI Cognitive Finance Institute, western industrialized countries have for some time now been showing an increasing tendency to finance government spending and rising deficits through money printing by the respective central banks. In the course of the recent corona crisis, this tendency to create more and more money has again increased dramatically: "The enormous corona deficits of the G7 countries are being paid for by the central banks, which are already printing over 8 trillion euros of new money for this purpose," says Rapp. "Through the back door, the major central banks have thus installed a new monetary policy regime: direct state financing through monetization".

Central banks worldwide increasingly politicized

The path to monetary public finance would require a high degree of consensus between the government and central banks. In contrast to the independence of the central banks, which had previously been emphasized, they are now increasingly politicized and geared to the fiscal objectives of governments. The new US administration is also following this pattern: "Janet Yellen has very close ties with the Federal Reserve and enjoys worldwide recognition for her monetary policy expertise. This makes her more predestined than almost anyone else to organize a close intertwining of monetary and fiscal policy in the US in the coming years," explains Rapp.

Modern Monetary Theory through the back door, also in Europe

Without calling it that, the US would be setting the course towards the 'MMT', i.e. towards a sustainable financing of government spending, deficits and debt with newly printed Federal Reserve money. "It is fitting that the ideas of the MMT are strongly anchored in the Democratic Party in particular," stresses Rapp. But the same pattern is now being followed in Europe, where Christine Lagarde, a former French finance minister (and IMF chief), without any expertise in monetary policy, has suddenly been appointed head of the ECB. "Here, too, the same principle is evident: it is a question of the direct interdependence between fiscal and monetary policy, i.e. between the financial needs of highly indebted EMU countries and the ECB's potentially very deep pockets," explains Rapp.

Central banks would thus increasingly become subdivisions of governments, with a clear mandate to settle escalating national debt with newly printed money. This trend is now worrying, as it is leading to unchecked money creation and a monetary dilution of the entire financial system, according to a clear warning from the FERI Cognitive Finance Institute.

As early as 2019, the FERI Cognitive Finance Institute analysed the problem of massively increasing monetary dilution in a detailed study ("Modern Monetary Theory" and "OMF" - Monetary Dilution and Monetisation on the Advance). The short version of the study is available here; the complete study is available at info@feri-institut.de.