Forced into record spending by the threat of another Great Depression, policy makers are blurring the lines between borrowing the money they need and simply creating it.

Most modern economies have tried to keep the two activities as separate as possible. The typical setup has been for elected politicians to take charge of budgets, and meet any shortfall by borrowing on bond markets –- while the money-printing machinery was walled off in another branch of government, the central bank.

But those barriers began to look porous after the financial crisis of 2008. And in the coronavirus slump, they’ve all but disappeared.

Lenders of Last Resort
With entire industries shuttered and unemployment soaring, only public spending is keeping millions of households and businesses afloat. The governments on the hook for this relief effort are running up some of history’s biggest budget deficits. And they’re paying at least some of the bills with what are effectively loans from their own central banks –- debt that can be rolled over indefinitely, and is really more like money.

“We’ve had a merger of monetary and fiscal policy,” says Paul McCulley, the former chief economist at Pacific Investment Management Co. “We’ve broken down the church-and-state separation between the two.”

“We haven’t had a declaration to that effect,” says McCulley, who now teaches at Georgetown University. “But it would be surprising if you had a declaration -- you just do it.”

In the U.S., the Federal Reserve is set to buy $3.5 trillion of bonds this year, according to Bloomberg Economics estimates. Most of that will be Treasuries, covering the best part of a fiscal shortfall forecast to reach at least $3.7 trillion. Nobody knows when the debt will be offloaded from the public balance sheet into the hands of private investors, if it ever is.

Similar stories are playing out across developed economies from Europe to Japan -- and even in some emerging markets, with Indonesia and Poland joining the fray.

Behind the longstanding taboo against what is known as “monetizing debt” lies the fear of inflation. History is full of episodes when politicians grabbed control of the printing presses and splashed too much money around the economy, causing prices to spiral out of control and eroding the real value of all kinds of savings, from bank accounts to bond portfolios.

Spenders of Last Resort
Central banks were kept apart from the rest of government precisely in order to apply the brakes when politicians went too far. That autonomy will likely be needed again one day, says McCulley, who helped steer Pimco through the 2008 financial crisis and came up with terms like “shadow banking” and “Minsky moment” to define it. “It’s just not needed now. So for now, let’s just suspend it.”

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