Thursday, April 5, 2012

Once again, the difference between monetary and fiscal

If for example your daughter was very sick and needed an expensive surgery that the $50,000 would cover this exacerbates things by another major factor in favor of the check -from the stand point of your own personal welfare.

If we have another Katrina like event where would assistance be more beneficial if we need $100 billion dollars to fully deal with the crisis? Would it be better to have the Fed buy $100 billion in T-bills or send it to the state the disaster occurred at giving the money to the fire department and the Red Cross.
Read it at Diary of a Republican Hater
MM vs. Krugman vs. MMT: Political and Definitional Debate?
by Mike Sax

A fiscal transfer injects net financial assets into domestic private sector. The Fed is not empowered to make fiscal transfers.

Purchase and sale of tsys by the Fed alters the composition and term of non-government net financial assets without affecting the amount.

5 comments:

Matt Franko said...

Right it's like the Fed couldnt 'send 100B" to New Orleans... they could perhaps buy 100B of assets off of the state of Louisiana though...


Resp,

mike norman said...

"The Fed is not empowered to make fiscal transfers."

I have been saying this forever.

Buying state assets is just an asset swap.

Anonymous said...

I made the following reply to Mike:

____


While perhaps the macroeconomist would say there is no difference in terms of its overall welfare effect on the economy, that we're up $50,000 even way for you personally it would make a huge difference. If you were short money your welfare would be greatly enhanced by the check, whereas the T-bills would have minimal effect for you.

Hi Mike,

I think this shows that the disagreement is not simply about politics and arbitrary definitions, but about substantive issues.

If a macroeconomist says there is no substantive difference between these two procedures, then I have to say, in light of the kinds of empirical considerations that Scott Fullwiler lays out so well, that macroeconomist is just wrong. The statement is as wrong as saying that it makes no difference whether you sow a bag of seeds on rocks or fertile ground, because the agriculture system gets the same number of seeds either way.

$50,000 distributed to households with a high propensity to consume will add immediately to aggregate demand. A very high proportion of that money will be used to purchase goods and services, and lead to higher production of of goods and services and higher employment. $50,000 added to a bank's reserve balance does no such think. It makes a marginal difference to the bank's cost of reserves, and is unlikely to affect its lending decisions in any significant way. And even if the bank does lend more, the added purchasing power the borrower receives comes in the form of credit that has to be paid back.

It really makes a difference whether the money multiplier account of bank lending is true or false. And I believe its false

Krugman tried to take this easy way out too, by saying that it doesn't matter whether the central bank targets a decrease in the overnight rate by increasing the quantity of reserves, or targets an increase in the quantity of reserves by lowering rates. Something like the money multiplier works either way. But the point is that if you just think about the sheer mathematics of adding reserve balances to bank reserve accounts, and understand how banks make their lending decisions, it should be obvious that those added balances don't create nearly as much of an increase in demand as occurs when the money is sent to consumers instead.

It's true that if some act of increased spending from the public treasury is "monetized" rather than corresponding to increased taxation or increased borrowing from the public, then it is justifiably regarded as an act of both fiscal and monetary policy. So some acts of monetary policy are acts of fiscal policy. But that doesn't mean that every act of monetary policy is an act of fiscal policy; and it certainly doesn't mean that any act of central bank additions to bank reserves will be just as effective as an act of treasury additions to the disposable incomes of consumers.

There definitely is politics involved in this debate. But that doesn't mean its just some idle and meaningless ideological ramble. Its political disagreement about stuff that really matters. My view is that the old guard of the economic establishment, which serves the wealthy above all, is desperately trying to prevent the public from realizing that the government is creating money all the time, but that it just gives this money to banks, and big players and dealers in the financial sector, instead of to ordinary people in the real economy.

The government is the monopoly supplier of net financial assets and is boosting the net supply of private sector financial assets all the time. But we have a choice: do we feed those assets into the system only through the channel that consists of banks and privileged financial players, or do we feed them in through the bank accounts of ordinary folks?

Anonymous said...

"the government is creating money all the time, but that it just gives this money to banks"

Isn't this how governments avoid capital flight? You've got to give the capitalists something to keep them happy. This is capitalism after all.

Leverage said...

Dan,

Exactly right, an other related harmful statement is the one: "debt does not matter because for every borrower, there is a saver".

Right, so when debt is skewed towards a certain strata of the whole population and that debt has to be repaid it's a liability on the balance sheet which diminishes disposable income for consumption. this has a real effect on aggregate demand and so, in economic activity and on employment (usually created by these same savers, the capitalists, who end having more money they can realistically spend in meaningful ways that create real output demand and jobs), which react to the demand of their own offered products.

So it's a false assumption that aggregate amounts of debt do not matter, they matter when you examine incomes, prices, and financial costs of the debt. So the solution is not 'more lending' and increasing financial burdens and costs (because eventually rates will rise), but facilitate balance sheet reparation, and there are only two ways to do that: provide financial assets to pay liabilities (deficit spending), or reduce the size of these liabilities (credit writedowns).

Sometimes I ask myself how some economists can be blind to obvious things like this.