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Money for Nothing

The persistence of low inflation across advanced economies has led central banks into the realm of zero and even negative policy rates, with the result that government borrowing (and thus spending) is now free. Populist politicians find themselves right at home, while those warning that there is no free lunch will be ignored – until it is too late.

MUNICH – A monetary-policy regime centered on quantitative easing (QE) and zero or even negative interest rates has created an extraordinarily permissive environment for politicians of a certain disposition. Those who are willing to exploit current conditions to boost their own popularity can expect clear sailing ahead – at least for now.

Throughout almost all of the advanced economies, monetary and fiscal policymaking are interacting in a new and unique way. Consider, for example, that the German government just issued 30-year bonds with a negative yield. That means it can borrow for free, and, in theory, do anything it wants – at no cost. And Germany is hardly alone, which is why it is not surprising to hear a growing chorus of voices calling for greater fiscal activism at the first sign of a growth slowdown.

Obviously, the current situation could have far-reaching monetary and distributive consequences, given that governments are gradually expropriating from the traditional rentiers. But that is just the start. Politics itself has always been about managing tradeoffs. Money spent in one area cannot be spent somewhere else. If nurses and doctors are paid more, teachers, police, or firefighters will be paid relatively less. Governments must choose between cutting taxes and building new high-speed rail links, aircraft carriers, or roads and bridges.

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