An Experiment That Could Heal Americas Economy (Theoritically)

[Economy 52,864]

What if The Federal Reserve (Americas Central Bank) by law didnt have to work seperately from the Federal Government? What if they cut the politics and the two Branches could work together and each use their own seperate tools in Harmoney?

I have a theory that would allow the Government to increase spending to stimulate weak economy without adding to the deficits, while keeping a cap on inflation and asset bubbles that may be forming as a result of interest rates at 0% for so long. But THE FEDERAL GOVERNMENT AND CENTRAL BANK WOULD HAVE TO WORK TOGETHER FOR THIS TO WORK!!!

Step 1: The Central Bank would print $70 Billion a month ($840 Billion a year) which is about the same as it was printing for QE but instead of buying bonds and assets with it, just give it to the Government so they can spend it on infrastructure and other forms of stimulus to help the economy without adding to deficit

Step 2: As the Central Bank prints $70 Billion a month to give to Government... They should sell at least $40 Billion a month worth of assets they bought with QE. That will help pump liquidity (money/currency) out if the system so the money printing doesnt cause hyper inflation. It will also help with recent worries of asset bubbles

Step 3: Gradually raise interest rates from the current 0%. That will slow creation of credit which would further reduce inflationairy pressures, while simultaniously encourage people to save again and would also help fight asset bubbles as well.

This 3 step system i came up with would give Government more cash to spend on stimulus without adding to deficit, while simultaneously keeping inflation low, allowing Federal Reserve to start reducing its massive $4 trillion balance sheet of assets it accumulated during QE, and make the switch to higher rates less painful :)

[Computer 10,980]

Intriguing.

 

I am kind of afraid Step 1 will directly cause inflation though.  When the Fed does QE to buy Treasuries, it affords liquidity to the government but keeps them on the hook to pay it back.  Wha you're describing is a free cash giveaway.  I think it sets a bad precedent.

 

And step two, by selling everything they bough with QE they will plunge the value of Treasuries and therefore the dollar.  Which would be... deflationary.

OK I confused myself.

 

Maybe it could work.  Maybe.

[Mr Josh 3]

Inflation

[Economy 52,864]

Intriguing.

I am kind of afraid Step 1 will directly cause inflation though. When the Fed does QE to buy Treasuries, it affords liquidity to the government but keeps them on the hook to pay it back. Wha you're describing is a free cash giveaway. I think it sets a bad precedent.

And step two, by selling everything they bough with QE they will plunge the value of Treasuries and therefore the dollar. Which would be... deflationary.

OK I confused myself.

Maybe it could work. Maybe.

step 2 is meant to help neutralize the side effects of step 1 (inflation) while simultaneously allwing Fed to start winding down its massive $4 trillion balance sheet and also help prevent asset bubbles by cooling the financial market that seems to be too many steps ahead of itself considering the economy hasnt caught up to it

The tresuries shouldnt need so much support. If the econoy would be stimulated by this they could survive on their own. Also yields would rise a little once Fed started selling tresuries...

The higher yields would further fight inflation and attract extra bond investors to make up for what the Fed would be selling :)

Step 3 is actually inevitable. Rates will HAVE to go up eventually. Were on year 6 of rates at 0% and it causes some unhealthy distortions...

So if u did it at the same time u made this steps it might help make the process easier

I think it could work!!! Too bad the Fed and Government work seperately. And even if they didnt we all know politics would get in the way of thek working together properly :roll:

[Economy 52,864]

Inflation

thats what ppl said would happen with QE and it didnt happen

As long as enough currency is disapearing to make up for the bew currency u dont get inflation.

QE didnt result in inflation because during a financial crisis when u get deleveraging there is more currency being destroyed than there is being created by credit. So the $75 billion a month they did in QE only filled in the difference and prevented inflation

The step 2 and step 3 would also pump liquidity out. Actually, step 2 would start pumping out liquidity that was created out of nothing during QE which they did during desperate times

And step 3, higher rates fight inflation cause it encourages saving and reduces credit creation

Not to mention all this would also help fight off the early signs of asset bubbles as a result of 6 years of interest rates at 0% plus Quantitative Easing on top of that!!!