Good Fiscal Policy Needs Good Monetary Policy

The American people are increasingly frustrated by the inability of Washington to cut spending. The side of limited government has been on the losing end of every fiscal battle under President Barack Obama. Meanwhile, the Democrats in Congress have been so embarrassed by the deficits they have sanctioned during the last four years that they have made no effort to adopt an actual budget.

How does this reckless approach to governing sustain itself?

A more precise way of asking that question is: Who will pay for the $1 trillion deficit projected for 2013? The answer is the Federal Reserve. The Fed plans to buy roughly $1 trillion in government securities this year, meaning that it will absorb Congress’s deficit spending by purchasing the equivalent in bonds used to finance it. The simple fact is that Congress relies on the Fed to provide the money for its uncontrollable spending binge, and the Fed is a willing partner.

During the last four years, Fed Chairman Ben Bernanke has made a special effort to keep interest rates as close to zero as possible. He’s said it’s supposed to lift the economy, but all we’ve seen during that time is a painfully slow recovery. Low interest rates, rather than benefiting families and small businesses that are the lifeblood of the economy, have mostly helped the government by enabling it to borrow more. The federal government is larger than ever but the average interest rate it has to pay to service its debt – 2 percent – is at a historic low thanks to the central bank’s actions.

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