Alan Greenspan recently warned expressed concern about the US fiscal position, warning ecently He warned that monetary policy “cannot ignore the potential inflationary risks inherent in our current fiscal outlook . . .”He also declared: “…I assume that [ He also said: “I assume that [fiscal] imbalances will be resolved before stark choices again confront us and, if they are not, the Fed will resist any temptation to monetise fiscal deficits.” Emphasis added.]

That was a curious remark because the reigning economic theory of who “wins” when monetary and fiscal authorities square off is called “fiscal dominance”. America’s public economic institutions are structured to afford maximum, but not full, independence to the Federal Reserve. The US Federal Reserve enjoys considerable but not full political independence. Exchanging Treasury bills for cash is how the Fed controls the amount of bank reserves in circulation, thereby manipulating the interest rate on inter-bank loans – the “Federal funds” rate. Changes in that rate influence interest rates on all sorts of other debt securities, including those with considerably longer maturities. Using this mechanism, the Fed regulates the amount of liquid assets in circulation and the pace of overall economic activity overall to deliver on its two goals – maintaining price stability and achieving maximum sustainable economic growth.