Naked Capitalism has the article Central Banks Pushing on Strings Again.
This month has seen the antipodean central banks both cut rates, with almost no flow through to mortgages to relieve consumer debt and an appreciation in their respective currencies, in perfect opposition to their stated goals.
This is not a new trend – far from it. What’s supposed to happen when the local economy slows is you pull the lever, Kronk, lower interest rates stimulate consumer spending, reducing savings rate as a deluge of money floods the economy, inflation goes up, wages go up, more spending and whoosh, in come the accolades from the captured business media elites.
Now levers are pulled left right and centre and nothing seems to happen, further hindered by a lack of communication from both monetary and fiscal authorities into the truth of the matter at hand – that a lack of confidence in the direction of the economy is what is holding back consumer spending, not lower rates.
I’d like to throw out the following challenge to conventional economic theory.
Does even a fiscal stimulus of a budget deficit always stimulate the economy?
I have been thinking that with our current system, the federal government finances deficits by selling bonds. So whatever liquidity they push into the system is offset by taking it right back out in the form of bonds sold.
What deficits really do to stimulate the economy is to redistribute a fixed amount of liquidity in the private sector. When this entails taking money from the wealthy who do not recirculate it, and putting it in the hands of working people who do circulate it, then we get stimulus.
When deficits don’t stimulate the economy is when the deficit is the result of tax cuts that leave the liquidity in the hands of the wealthy. Taking liquidity from the hands of the workers when we shift the tax burden from the wealthy to the workers is the opposite of stimulus.
I’d love to see some research done on this idea and some article published.