The message treads across the media terrain, beating louder and louder as if to drown out the beat of the distant drummer.
Warning! The only thing the stimulus will stimulate is inflation. The people will pay as the wealthy elite invests their windfalls in financial assets. Doom and gloom set to march across the land to the beat of the distribution of stimulus funds.
In recent years as past predictions of fiscal disaster following stimulus spending failed to materialize and so the thinking about national debt and deficits has evolved, most noticeably with the development of Modern Monetary Theory.
In the fall of 2020, National Affairs published a story, Does the Debt Matter? by Peter Wehner & Ian Tufts. Peter Wehner is vice president and senior fellow at the Ethics and Public Policy Center and served in the last three Republican administrations. Ian Tufts is a recent graduate of George Mason University, from which he received his bachelor of science degree in economics.
Wehner and Tufts dig into the reasons why past stimulus funding did not result in hyperinflation and economic downturn, striking a balance between caution and optimistic innovation in thinking about the macroeconomy.
The story quotes Stephanie Kelton, author of The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, urging political leaders to “acknowledge that the deficit itself could be deployed as a potent weapon in the fights against inequality, poverty and economic stagnation.”
A Balancing Act
The Modern Monetary Theory grew out of the awareness that an economy based on fiat money functions differently than a monetary system based on the gold standard. Distributing fiat currency into an economy will always be a function of central management, requiring artful balancing and leadership of solid character. As long as the management of fiat currency continues to work, it's not going away but it needs to include metrics for managing a healthy balance in the distribution of wealth.
Fiat currency is a function of central management, a top-down system. Since the seventies, the US economy has been centrally managed through top-down wealth distribution in the form of grants, tax credits and exemptions, and stimulus programs. Until coronavirus, stimulus spending distributed wealth into the economy from the top, but the corona stimulus is different. It redistributes wealth, with no stipulations about how to spend it, to the individual, at the roots of the economy, initiating a new philosophical economic perspective.
|Art, Discipline, and Balance Required! Photo by nihal-demirci-unsplash|
The Federal Reserve is the central bank of the United States. Congress writes monetary policy and delegates responsibility for managing the policy to the Federal Reserve and oversees the Fed assuring that it is consistent with statutory mandates:
Monetary policy in the United States comprises the Federal Reserve’s actions and communications to promote maximum employment, stable prices, and moderate long-term interest rates — the economic goals the Congress has instructed the Federal Reserve to pursue. https://www.federalreserve.gov/monetarypolicy.htm
The Federal Reserve, as America’s central bank, is responsible for controlling the money supply of the U.S. dollar.
The Fed creates money through open market operations, i.e. purchasing securities in the market using new money, or by creating bank reserves issued to commercial banks.
Bank reserves are then multiplied through fractional reserve banking, where banks can lend a portion of the deposits they have on hand. Understanding How the Federal Reserve Creates Money-Investopedia
The fact that Congress, and not the Federal Reserve directed the flow of fiat money to the individual rather than only to the institutions is a good thing because Congress is an elected body, giving the people a voice in how fiat money flows into the economy. One danger in fiat currency is the manner by which it can be used to control people and in that respect, elected officials are to be desired.
Were the Jeckylls able to jointly commit not to trade via credit cards, they could all steer clear of the Hydes and all be better off. But once all the other Jekylls are trading with credit cards, the resulting inflation has already robbed each Jekyll of some of the purchasing power of his cash endowment. When credit cards do not default, the efficiency gains in trade overcome this loss of purchasing power. But with default, the wedge between buying and selling prices is increased, and trading efficiency is diminished. …A monetary authority, alarmed by the inflation, might try to undo it by tightening the money supply. We show in Theorem 5 that the authority can indeed cut the money supply to reproduce the pre-credit card equilibrium cash prices. But at the same time it will have to reduce trade to the pre-credit card equilibrium levels. This means giving up all the efficiency gains created by the credit cards. Furthermore, this tightening does not completely undo the inflation because credit cards and money are not perfect substitutes: if the cash prices are brought back to their pre-credit card levels, trade will be back to where it was before, but the credit card prices will have to be slightly higher. Thus the average (credit card and cash) price would not be restored. This is a touch of stagflation.
“Over the past two centuries,” they wrote, “debt in excess of 90 percent has typically been associated with mean growth of 1.7 percent versus 3.7 percent when debt is low (under 30 percent of GDP), and compared with growth rates of over 3 percent for the two middle categories (debt between 30 and 90 percent of GDP).” Does the Debt Matter ? by Peter Wehner & Ian Tufts.