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Print Money And Buy Non-government Debt Assets?

There is a glaring flaw in using artificial interest adjustments to regulate demand. It could seem, it can argued that the mere fact of a tough economy persisting is evidence that interest rates have not fallen much or fast enough and hence that artificial interest cuts are justified. However, that idea is valid if it can be shown that there surely is some kind of obstruction in the way of interest rate reductions, i.e. market failure.

And it is definately not clear what that blockage might be. That is, the market for loans and cost savings would seem on the face from it to be very much of a free market: savers check around to discover the best deal as do debtors. Artificial interest changes may be justified if they work a lot more quickly and/or predictably that fiscal stimulus.

But there isn’t much evidence of that: see for example Dyson (2010) p.10. Of course it might appear that fiscal changes work slowly because of the behavior of Congress in America where politicians sometimes spend a few months haggling over changes to taxes or public spending. Alternatively in the UK tax adjustments are sometimes announced by the united kingdom fund minister on budget day and come into effect the very next day.

Also in america, many arguments in Congress about changes to tax and public spending are in root arguments about whether to modify the deficit and therefore the national personal debt. As is shown below, it is properly feasible to have an operational system where deficit decisions are taken by technocrats, while firmly politics decisions stay with politicians. So if the latter idea was implemented, much of the argument that clogs up Congress at the brief minute would vanish. Abolishing interest rate adjustments was advocated by Friedman (1948): at least he advocated a finish to public borrowing which effectively means an end to interest adjustments.

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That idea was also advocated by Mosler (2011). Or to become more accurate, under Mosler’s “item 3” he advocates a long-term zero-interest rate (i.e. the federal government will pay no interest on its liabilities). That, to do it again, means an end to interest-rate adjustments. See also Mosler (2004), which also advocates a long-term zero rate. In contrast to rates of interest and the above point that we now have no apparent obstructions to market forces adjusting interest levels, there is another free-market cure for recessions which is quite clearly obstructed.

That’s the so-called “Pigou effect”: that’s the fact that in a flawlessly working or almost properly working free market and given a recession, prices and income would fall (in conditions of dollars, Euros, etc). That in turn would raise the real value of money (base money to be exact), which would encourage spending. In addition, the real value of the Federal government debt would rise, which would also increase the real value of the private sector’s paper wealth, all else similar.

However, as described for example by Wolf (2014, para starting “The purchases of equities…”) authorities’ debt and base money are practically a similar thing. To summarize, in a perfect market and given a downturn, the true value of the private sector’s stock of money and near money go up. However, there is an obvious blockage to the Pigou impact in real life, namely Keynes’s “wages are sticky downwards” trend. That is, any try to cut money income in real life is compared both trade unions and non-unionised employees.