In today’s Issue:

  • The new theory guiding our economic policy makers
  • Governments control monetary policy now
  • But the truth is hiding in plain sight

A new theory is spreading amongst the elites who control the levers of economic power. And it will guide them to make some shocking policy decisions in coming years.

But don’t panic. Because if you understand the theory, you can predict what they will do. And why it’ll fly in the face of what they were elected to do.

No doubt you remember when Modern Monetary Theory rose to power. Or the theory of Austerity. They certainly had an impact. Well, the new theory you’ll soon be hearing about daily is called…

Fiscal Dominance

“Fiscal Dominance” or “Fiscal Capture” has become the fashionable way to describe the pickle which governments and central banks find themselves in. It is emerging as the framework through which policy makers view challenges, make their decisions and communicate those decisions. It will determine how the next few years of UK government policy unfold.

Put simply, Fiscal Dominance argues that central bankers are now powerless. Governments are now in charge of everything from inflation to managing the national debt. Central bankers have been captured by the fiscal powers at the nation’s treasury, the Exchequer.

Fiscal Dominance has two “prongs” that explain how central bankers lost their throne to Treasury officials and politicians.

Firstly, government debt is too high for central banks to raise interest rates much further. If combatting inflation with rate hikes means bankrupting your government, then there is no real choice. You can’t do it.

Secondly, government debt is too high for central banks to stop funding government deficits. If governments were to try and stand on their own two feet financially, the bond market would have a heart attack.

We saw this with Liz Truss in 2022. We saw it with Italy in 2018 and Greece in 2015. We may soon see it with Donald Trump and it has already begun with Marine Le Pen.

Financial markets are presuming and relying on continued support from the Bank of England – implicit or explicit – to keep the government funded.

Put together, this means government budgets are so addicted to central banks’ printing press that they cannot do without. Which means central banks have to keep interest rates low, print money and fund the government by buying bonds. They have no choice. They are powerless.

This leaves governments in charge of the economy and currency. They can get away with anything and the magic money tree at the Bank of England will have to provide the funding.

A green new deal that’ll cost untold trillions? Not a problem, we can just spend the money and the central bank will have to buy the bonds.

A proxy war against Russia? There’s no excuse for money printing like a war!

A pandemic? We can afford to shut down the economy and throw government spending at the consequences. The Bank of England will just set up a pandemic bond buying program.

Inflation? Don’t worry, the Bank of England won’t raise interest rates for months. And even then, only by a fraction of what inflation went up.

Do you see how it works?

The government even controls monetary policy

Liz Truss spent 2022 blaming the Bank of England for inflation. But did the governor of the Bank have a choice? If they hadn’t printed the money to fund government spending, we would’ve struggled to pay for lockdowns, furloughs, vaccines and bailouts.

Wouldn’t that have been terrible…?

But consider the implications of this situation. If the Bank of England is stuck monetising whatever deficit the government decides to spend, this also means governments are responsible for the inflationary consequences of their policies.

The bigger the deficits and spending, the more inflation we get. If the government spends too little and taxes too much, you get less inflation, but also a recession.

The point is, the powers of economic policy making that used to lie in the hands of the Bank of England are now in the government’s hands.

A radical change in how the world works

If you believe in Fiscal Dominance the implications couldn’t be more stark for investors. Investment analysts need to pay attention to elections, not what monetary policy makers are saying. It’s the politicians that matter, not the Bank of England.

This is an extraordinary claim on the face of it. The last two decades’ trends inside and outside financial markets were defined by central bank policy.

QE, interest rates, green mandates, monetisation of debt during the European Sovereign Debt Crisis and the pandemic…it was all a story of mighty central bank policy controlling governments.

And your investment success was determined by whether you correctly or incorrectly anticipated central bank decisions.

But now that government debt is dangerously high, central banks have no choice but to fund the government, no matter how bad inflation gets. The alternative would trigger another sovereign debt crisis, but a global one.

A world of Fiscal Dominance is a world where governments run amuck and central bankers can only print money to keep up.

What happens when politicians have de-facto control of the monetary printing press?

Let me know, with your permission to publish: [email protected]

By the way, at The Fleet Street Letter, we believe that Fiscal Dominance has it precisely backwards. Someone else is controlling our government.

The theory of Fiscal Dominance is what hides who is really in charge. It is the ideology blinding us to the truth about who is really running the country. And they are hiding in plain sight.

We are all glued to the circus of the election, believing it will determine our future. But it is only a puppet show being controlled by those who really hold the purse strings.

And, on Thursday next week, we’ll reveal who it is and what they have planned for you.

Until next time,

Nick Hubble
Editor, Fortune & Freedom