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fiscal policy and monetary policy

Cullen,

Would it be possible for you to contrast the differences between monetary policy and fiscal policy for those (like me) who are economically ignorant?

thx, troll

Troll-

Monetary Policy is the Federal Reserve.   They set the short term interest rate.   They also can purchase Treasuries (lend money).   This is called Quantitative Easing or QE.   They can buy an infinite amount of Treasuries.

Fiscal Policy is set by our Congress and our President.   This how much we spend and what we spend it on.  They also control income taxes.     Since they control how much we spend and how much we collect in taxes, they are responsible for our Annual budget surplus or budget deficit.   They are the ones driving our $22.5 Trillion Debt and our $1 Trillion Annual Deficit.  They borrow this money by selling Treasuries.

You are probably wondering, “Isn’t the FED just lending money to the Federal Government?”   (Since the Treasury is selling Treasuries and the Fed is buying them)

Well actually the Treasury sell Treasuries to the Banks at an Auction.   And the Fed buys treasuries from the banks.    So the banks act as the intermediary between the Fed (Lender) and Federal Government (Borrower).

By essentially taking both sides of this transaction and lending money to ourselves we are increasing the money supply.    This helps to fight deflation.

As you see more deflationary forces, the Fed (Monetary Policy) will need to do more QE: Buy more Treasuries.

The Congress (Fiscal Policy) will need to go much deeper into debt: Sell more Treasuries.

We can create as much money as we want/need to in order to support asset prices, and that is exactly what we have been doing for the past decade.   It is what we will continue to do for the foreseeable future.  Unless we decide to just allows deflation to take hold and allow ourselves to fall into a Depression.

 

 

 

 

 

Quote from ClarenceBeeks on 08/25/2019, 9:23 AM

Troll-

Monetary Policy is the Federal Reserve.   They set the short term interest rate.   They also can purchase Treasuries (lend money).   This is called Quantitative Easing or QE.   They can buy an infinite amount of Treasuries.

Fiscal Policy is set by our Congress and our President.   This how much we spend and what we spend it on.  They also control income taxes.     Since they control how much we spend and how much we collect in taxes, they are responsible for our Annual budget surplus or budget deficit.   They are the ones driving our $22.5 Trillion Debt and our $1 Trillion Annual Deficit.  They borrow this money by selling Treasuries.

You are probably wondering, “Isn’t the FED just lending money to the Federal Government?”   (Since the Treasury is selling Treasuries and the Fed is buying them)

Well actually the Treasury sell Treasuries to the Banks at an Auction.   And the Fed buys treasuries from the banks.    So the banks act as the intermediary between the Fed (Lender) and Federal Government (Borrower).

By essentially taking both sides of this transaction and lending money to ourselves we are increasing the money supply.    This helps to fight deflation.

As you see more deflationary forces, the Fed (Monetary Policy) will need to do more QE: Buy more Treasuries.

The Congress (Fiscal Policy) will need to go much deeper into debt: Sell more Treasuries.

We can create as much money as we want/need to in order to support asset prices, and that is exactly what we have been doing for the past decade.   It is what we will continue to do for the foreseeable future.  Unless we decide to just allows deflation to take hold and allow ourselves to fall into a Depression.

 

Follow up questions (for my understanding):  So if there are inflationary pressures, the FED would buy less treasuries?  Wouldn't this cause the banks to purchase less treasuries from the Treasury?  Wouldn't the Treasury then have to sell the treasuries at rock-bottom price, thus greatly increasing the debt?  Is this why the Fed eyes a 3% inflation rate as the "Goldilocks" rate?

 

 

 

 

 

 

Hi Troll,

I have written many articles about how QE doesn’t really impact inflation/deflation too much so I wouldn’t worry about that. It’s all just an asset swap of cash for bonds.

Fiscal policy is what the Congress and Treasury manage. Basically, spending and taxes.

Monetary Policy is what the Fed manages. Basically interest rates and interbank lending.

Fiscal is where the real “money printing” occurs. Monetary policy is mostly just trying to influence banks and the economy more indirectly via interest rates and portfolio holdings.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Here is someone who thinks that monetary policy is very important?

 

“Given that the Fed and the ECB have shown a welcome pragmatism in responding to the current global slowdown, and given also that – despite our concerns – money growth trends remain more or less satisfactory, a central forecast for 2020 can sensibly be for roughly trend growth of the world economy accompanied by low inflation. As ever, many worries surround a benign view of this sort, but recent financial events in China and India – like those in the developed world – also support it. “

 

https://gallery.mailchimp.com/78302034f23041fbbcab0ac6d/files/e895cec6-e926-428a-b90e-b41a65f7674c/Monthly_e_mail_1907_Global_money_round_up.pdf