Alt-M And Deflationist-Statist Fiat-Money Central Banks

A Benjamin Cole post

There is a still-popular framework in some monetary circles (including parts of the Alt-M crowd) that fiat-money central banks are statist-inflationist redoubts, despite the last 35 years of global disinflation and then deflation, along with falling interest rates.

The track record of the last few decades suggests that major fiat-money central banks are actually disinflationist and then deflationist, and appear unwilling to alter course.

The old argument was that nations want to pay off debts with cheap money. So nations deploy central banks to print money—the word “debauchery” and “theft” are often used—and pay off bondholders with devalued currency, cheating the lenders of their just due.


Of course, today we see Europe and Japan in quicksand-deflation and ZLB, and the U.S. perhaps but one recession away from a similar fate.

The sinister statist-inflationist central banks are proving themselves incompetent at printing up cheap money. How can this be?

The Answer

What if the statist central banks are actually very clever? They have figured out that if they can engineer deflation, then nations can borrow in perpetuity for something close to free. Japan, for example, is floating the idea of perma-bonds that pay no interest.

And through quantitative easing, nations are paying off national debt without inflationary consequence, as long as central banks can keep deflation as the norm. In Japan, for example, the Bank of Japan owns one-third of that nation’s national debt.

Central banks, by keeping interest rates artificially high—remember, with ZLB rates have a floor, despite some negative-interest rates here and there—they can use QE to pay off national IOUs forever.

The long road to deflation and ZLB has also resulted in incredible riches for bondholders, who saw their holdings soar in value. Far from being robbed, bondholders have effectively enjoyed three decades of Fat City Boom Days thanks to central banks.

Just by chance, I am sure.


A good cabal theory is that wealthy and politically influential bondholders, through captive central banks, have engineered an economy-sapping long disinflation and then deflation, extorting rising real rents along the way on soaring bond values.

Well, as cabal theories go, it holds more water than the inflation-statist fiat money central banks tale.

6 thoughts on “Alt-M And Deflationist-Statist Fiat-Money Central Banks

  1. Love it! And I have actually seen it in action, at packed meetings of fixed income investors pressuring central bankers into ever tighter monetary policy. Equity investors never seemed interested. Those bond investors are squealing now though as they need the income more than they need the capital gains, if for no other reason to offset their fat fees!

    • Thanks James.
      Yes, I should have ended with a doomsday scenario for bondholders and the economy, due to their lack of ethics but surfeit of entitled avariciousness. Maybe in the next post.

      • of course, they are not evil, just completely wrong-headed. they do have a duty to ask themselves why there is not inflation despite all the “ultra-accommodative” monetary policy. and if they don’t ask themselves that question they should are not qualified to do their jobs, but then their bosses need to do the same, and so on

  2. I think you’re right. And in their NAIRU framework, they want to settle unemployment a few tenths too high. So after on or two more hikes in IOR, they will spend the next decade or two mired in low-flation right near the ZLB. Sad.

      • Ben – I hate trying to read other people’s minds, but here is a guess. In the current situation, almost nobody (only market monetarists) blames the Fed for the sluggish situation. People are concocting all sorts of theories like secular stagnation and demographic change and lack of fiscal stimulus (definition of fiscal stimulus always changes to show that it wasn’t enough) to explain matters. Inflation could average 1.3% and NGDP could grow 2.5% per year for the next 10 years and almost no one will see that as a Fed caused problem.

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