With sovereign debt, can governments and central banks have it all? Fourteen experts share their thoughts.

• Position: A SYMPOSIUM OF VIEW

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Is there a limit to the amount of public debt global central banks can purchase ? Or are central bankers the new debt purchasers of last resort? If so, what are the short-term and long-term consequences of a situation in which the world's sovereign and agency debt approaches 100 percent of GDP, yet short-term interest rates remain relatively low as a result of central bank targets? Will the long-term result be global hyperinflation? Or will an extended policy of central bank purchases prove to be contractionary, perhaps producing a crowding-out effect? Or can governments and central banks have it all in the sense that the effect from such debt purchases will be relatively benign, perhaps because of the relative short-term nature of the purchased debt?

Fourteen experts share their thoughts.

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Yes, but only if we quickly return to normalization.

JURGEN STARK

Member of the Executive Board, European Central Bank

Governments and central banks in advanced economies resorted to unprecedented measures in response to the financial crisis. The purpose was to avert a meltdown of the international financial system, a global economic depression, and sustained deflation. This goal has been achieved but the costs and side effects of rescue measures are becoming increasingly visible. If maintained for too long, the same measures that stopped the economic freefall in the midst of the crisis will sow the seeds for renewed imbalances down the road. The time has come to return to normal.

In the euro area context, the roadmap is clear. In a nutshell, the European Central Bank needs to take appropriate action to ensure price stability in the medium term; governments need to consolidate public finances and enhance the competitiveness of their national economies; and financial regulators and supervisors need to decisively strengthen the resilience of the financial system. If action by all policy actors--each one in its own domain--is determined and comprehensive, then governments and central banks can indeed have it all: price stability, fiscal sustainability, balanced economic growth, and financial stability.

The European Central Bank will do all that is necessary to keep inflation expectations in the euro area firmly anchored in line with our price stability definition. The monetary policy stance will be adjusted as necessary and the non-standard monetary policy measures adopted during the crisis discontinued as the need for these measures vanishes. This logic also applies to our Securities Markets Programme. The action we took to help restore an orderly functioning of securities markets has not impacted liquidity creation and thus has been neutral to the determination of inflation and inflation expectations. Europe has learned its lesson from the past: under no circumstances will there be monetization of government debt in the euro area.

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What we're witnessing is an unprecedented experiment.

SEBASTIAN MALLABY

Director, Maurice R. Greenberg Center for Geoeconomic Studies, Council on Foreign Relations

These are fascinating times for central bankers. The power implicit in the creation of fiat currencies is being stretched and tested more than at any time since Nixon's abandonment of the dollar-gold link in 1971. For most of the four decades since that fateful decision, to print money was to invite inflation. But since 2008, excess capacity, high unemployment, and the continued downward pressure on prices from global competition have meant that money could be printed without causing inflation. Governments have been able to conjure spending power out of thin air. The question is when this magical power will be rescinded.

So far it has not been. In the United States, the Fed has printed trillions of dollars to support quantitative easing and emergency relief for troubled financial firms. In the eurozone, the European Central Bank has ballooned its balance sheet, pumping money into the economy as it has done so. Even before the earthquake and tsunami, the Bank of Japan had been following the same script. After the tragedy, it immediately pumped out trillions of new yen to prevent a breakdown of the payment system. And yet, as of the spring, inflation was running at just 2.5 percent in the eurozone and 1.5 percent in the United States. In Japan, inflation was zero.

Money cannot be printed forever with impunity. Investors who believe that central banks will overplay their hand have taken refuge in gold, causing its price to double since late 2008. The central bankers, for their part, insist that they have both the tools and the will to stop the printing presses before inflation takes off. We are witnessing an unprecedented experiment.

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There are reasons to be suspicious.

VINCENT REINHART

Resident Scholar, American Enterprise Institute, and former Director of Monetary Affairs, Federal Reserve Board

Central banks cannot have it all, but they can issue as much currency and reserves as they want. A modern monetary authority can purchase government securities by creating reserves with a few keystrokes and typically has considerable independence to do so. Consider that the U.S. Federal Reserve was able to triple its balance sheet in three years, unimpeded by the executive or legislative branch of government.

Control of its nominal balance sheet does not give the Fed unlimited license to grab real resources. As of now, the $1.5 trillion of reserves that the Fed has created mostly sit idle on domestic bank balance sheets. Were those reserves to remain for the indefinite future, they would be used and put considerable upward pressures on prices. The purchasing-power capacity of the Fed's balance sheet would contract and the borrowing cost of the federal government would balloon.

The Fed will have to raise the policy rate from its zero floor and slim its asset holdings to avoid that dire outcome. But not right now. Resources are currently slack and inflation dormant. The Fed's current job is to convince the public it will act appropriately when the time comes.

A sensible person might be suspicious for two reasons.

First, deep down, U.S. authorities would not mind a bit of extra inflation. The surprise would bolster nominal home prices and erode the real value of Treasury debt.

Second, politicians have to bend down the curve of debt issuance in the next few years. If not, foreign official investors will ultimately balk at continuing to be the buyers of first resort of U.S. debt and a reluctant Fed might become the buyer of last resort.

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No, the consequences are negative if limits are exceeded.

HELMUT SCHLESINGER

Former President, German Bundesbank

The short answer is no. There are limits, and if these are exceeded, the consequences are quite negative. For example, John Law, who served as...