How Long-Feared ‘Monetary Finance’ Becomes Mainstream

The coronavirus pandemic has turned into something of a break-the-glass moment for economic policy. One emergency measure involves governments borrowing from their own central banks to pay for extra spending. That idea, known as “monetary financing,” is getting hotly debated -- and perhaps even put into practice, smashing a long-standing taboo. To some, it’s just an extension of rescue plans that worked after the 2008 financial crisis. Others warn of a slippery slope that historically has led to out-of-control inflation.

It’s when a country increases spending and at the same time creates the money needed to pay for it. That typically happens via central banks, which can either buy the bonds sold by a government to cover gaps in its budget -- or simply offer an overdraft, so that no bonds need to be issued in the first place. In either case, it’s often said that the effect is to “monetize the debt,” because policy makers appear to have paid for things through the direct exercise of their ability to magic up the money. The appeal in a pandemic is obvious, with governments everywhere spending record amounts of cash to bail out households and businesses, raising questions about whether private financial markets would even be capable of absorbing such an unprecedented deluge of debt.