Monetary Policy for Full Employment and Price Stability

The Binzagr Institute for Sustainable Prosperity has the working paper Monetary Policy for Full Employment and Price Stability.

One explanation for the perpetuation of the barter economy story and the continued misunderstandings it creates about the tools available to a sovereign currency issuer is “because it is central to the entire discourse in economics” (Graeb er 2011, 44). Orthodox economics is a powerful institutional force that continues to ignore the historical and institutional realities of money at great cost to society. This separation from history allows a great deal of economic analysis to begin from an imaginary world where money emerges from market transactions and is thus a private phenomenon which is then inefficiently redistributed by fiscal authorities. The monetary policy analysis described from this imaginary world is one in which, “the whole discussion now takes place without requiring the mention of the word money ,” and this unnecessary commitment to real analysis is considered “intellectual progress” in the field (Friedman 2004, 83).

Meanwhile, the participants of the real world face the harsh realities perpetuated by disembedding our economy from social structures. These difficulties are displayed in a spatial quantitative qualitative sQ 2 method by utilizing geographic information system (GIS) maps. These maps will demonstrate some of the realities ignored by abstract economic analysis and provide the locations for which an alternative monetary policy can prevent and potentially heal the allostatic processes occurring in both the cities and rural areas across the United States. The combination of historical, institutional, and geographic analysis of the economic system is offered to shed new light on the value of expanding the policy disc ourse and how advances can be made by grounding economies and policy spatially, rather than in the abstract.

I have only read about 25% of this article so far, but it looks very promising. I record it here to make sure I don’t lose it in case I don’t finish reading it in this sitting.

This working paper provides me with much more explanation of what the Fed actually has done to alleviate the financial crisis that came to a head in 2008/2009. The analysis has been published before, but this is the first time I have had access to it.

I have seen the estimate of the size of the Fed efforts, but this is the first time I have seen a comparison of the size of the components of that effort. I won’t reproduce the graph here, but I will quote the summary.

As this abbreviated description of the stabilization plan of the Federal Reserve hopefully suggests, the actions are indeed unprecedented and extraordinary. After summing all of the individual transactions and unconventional LOLR facilities, Felkerson (2012) totals the response at $29,616.3 billion. [$29.6163 trillion]

Below is the beginning of an explanation of the limitations in what the Fed has been able to accomplish for reasons explained in the rest of the working paper.

Despite arguments that “credit easing will undoubtedly play a leading role in promoting a full recovery of the economy and financial markets” (Carlson et al. 2009), the economy remains hampered by long-term unemployment, part-time employment and a general economic insecurity despite 10 years of historically low interest rates.

Below is where we start to get into the solution this working paper proposes.

The reason QE has not been able to generate positive employment outcomes is that it is not purchasing the correct assets and it is failing to communicate the “objectives and outlook for the economy” (Bernanke et al. 2004, 77) in an effective manner. Rather than continuing the opaque process of purchasing assets from financial institutions for reserves they are not going to lend, the Federal Reserve needs to provide credit easing directly to those who need it most, Americans lacking credit and income, by lending against the strongest commodity collateral they possess, their labor power.

I translate this wordy explanation to mean applying (almost) traditional Keynesian fiscal stimulus. Or, I could call it fiscal stimulus disguised as monetary stimulus.

Here are some of the working paper’s own words to explain what they mean. You have to read the paper itself to get the details. I think I am bordering on the edge of fair use with my extensive excerpts.

The difficulty, as explained above, is in the financial order of operations. The Federal Reserve continues to swap collateral assets for cash in hopes of stimulating lending activity. Draining collateral from the banking system does not stimulate new lending activity and appears to make this process more difficult. In order to actually stimulate the economy, the Federal Reserve will need to undertake a new “monetarist experiment”. Similar to the radical transition made in the 1980s, this policy change is related to changing the money supply. This proposed experiment is guided by modern money theory and a Keynesian on-the-spot work program (Tcherneva 2012), falls within existing legal constraints of the FRA, and the theoretical prescriptions of the NMC.

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