Dr. Charles Calomiris, Henry Kaufman Professor of Financial Institutions Emeritus at Columbia Business School, joins The Julia La Roche Show to discuss his recent paper, Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements.
In this episode, Dr. Calomiris examines the state of the economy in the near-term and longer-term, as well as the fiscal challenges facing the U.S. According to Dr. Calomiris, there's a significant probability of a fiscal dominance problem arriving in the next decade. Fiscal dominance is the need for the government to fund its deficits on the margin with non-interest-bearing debts, also known as "inflation taxation."
He points out the need for political leadership and accountability in addressing the unsustainable promises of entitlement spending. Dr. Calomiris explains what could trigger panic in the bond market and the potential solutions, including taxing the banking system. He also discusses the implications of such policies on the banking system and the broader economy. Overall, he emphasizes the importance of addressing the long-term fiscal challenges to avoid a crisis in the future.
Timestamps:
00:00 Introduction and background
01:01 Short-run and long-run perspective of the economy
03:23 The dysfunctional state of the economy, the blame is ours
06:37 Generational government accounting and political responsibility
10:06 We are not a grown-up society right now
11:20 Debt situation in the U.S.
13:53 The point of no return?
17:50 Less than a decade to make the political decision
19:50 Deficits, recessionary environment, and the consequences
23:00 Signs to look out for in the bond market
24:40 Fiscal Dominance and its definition
27:30 Will the government tax the banking system into almost oblivion?
28:50 Taxing the banking system and the inflation tax
34:00 If nothing changes, how implied annual inflation could be 35-40%
37:00 Fed could raise reserve requirements and pay zero interest to expand the inflation tax base, lower implied inflation rate
40:00 Impact on the banking system
46:17 The power of the Federal Reserve
51:00 Bitcoin
54:19 Parting Thoughts and Advice
Links:
Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements
Fragile By Design The Political Origins of Banking Crisis and Scarce Credit
