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Sentiment changes to stimulate growth

Jake-migkillertwo
Posts: 67
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7/25/2012 9:40:08 AM
Posted: 4 years ago
At 7/25/2012 6:46:24 AM, Masego wrote:
Governments and central banks arround the world have to change consumer sentiment in order to truly see the effects of their policy

Consumer sentiment is one factor holding down aggregate demand, but central banks are inherently powerless to affect it. Central banks increase aggregate demand (and therefore economic activity) by changing the money supply. The money supply is determined by the amount of money that the central bank chooses to inject into capital markets. Increased money assets in capital markets reduce interest rates, which increase investment. Increased investment is equivalent to increased aggregate demand.

But central banks, largely, are powerless right now to affect the markets. Short term interest rates (the interest rates that affect business demand for inventories, and therefore the most immediate effects on economic activities) are close to zero. Monetary policy can never bring interest rates below zero percent because there's no benefit to investing in assets relative to holding cash.

Right now only fiscal policy can help consumer sentiment, and therefore aggregate demand. Preferably, we could use an investment tax credit to create a negative short-term interest rate to incentivize actual investment, or we could have a stimulus package comprised mainly of infrastructure spending and aid to state and local governments.
Masego
Posts: 4
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7/26/2012 7:39:26 AM
Posted: 4 years ago
There was an interesting idea proposed to me. I understood the intent but the practicality in this climate is not justifiable. The idea was that Bernanke should increase interest rates and the intent would be to somehow force businesses to spend the cheap cash they have been borrowing and are now hoarding. This is obviously great from a business perspective but from a consumer perspective (so long as the wealth effect is still subpar) it is (at least in the short term) potentially crippling. Throwing theory aside to an extent what I'm trying to understand is in the event that fiscus does not come to the party (which I suspect they wont at least in the short term), monetary accomodation whilst helpful has shown diminishing returns. Each time easing is used, it benefits the consumer less and less. So what alternative strategies within the Feds mandate would change consumer sentiment and facilitate employment? It feels almost as though theres some sort of game between govt. the fed and the private sector (the fed played and now one of the other two have to come to the party). I think what really baffles me is the fact that the govt. has literally borrowed money at cost and with all their borrowings they have not implemented some form of infrastructure development program as FDR did with his alphabet agencies.

I'd love to hear what you think though and thanks for the response, I think you and I agree on the fiscal policy.

At 7/25/2012 9:40:08 AM, Jake-migkillertwo wrote:
At 7/25/2012 6:46:24 AM, Masego wrote:
Governments and central banks arround the world have to change consumer sentiment in order to truly see the effects of their policy

Consumer sentiment is one factor holding down aggregate demand, but central banks are inherently powerless to affect it. Central banks increase aggregate demand (and therefore economic activity) by changing the money supply. The money supply is determined by the amount of money that the central bank chooses to inject into capital markets. Increased money assets in capital markets reduce interest rates, which increase investment. Increased investment is equivalent to increased aggregate demand.

But central banks, largely, are powerless right now to affect the markets. Short term interest rates (the interest rates that affect business demand for inventories, and therefore the most immediate effects on economic activities) are close to zero. Monetary policy can never bring interest rates below zero percent because there's no benefit to investing in assets relative to holding cash.

Right now only fiscal policy can help consumer sentiment, and therefore aggregate demand. Preferably, we could use an investment tax credit to create a negative short-term interest rate to incentivize actual investment, or we could have a stimulus package comprised mainly of infrastructure spending and aid to state and local governments.