Stimulus Can Flow From Monetary Or Fiscal Policy

Since 1982 whenever the economy has gotten into trouble the Fed has cut rates, often hard and fast. This has created a huge reliance on monetary stimulus. This is the handle the Fed has taken to controlling economic activity over the last several decades. It is also one of the main reasons markets are expecting lower rates going forward. 

The other way to kick the economy to a higher level is through government spending or fiscal stimulus. This is also known as government money printing. The national deficit has exploded in the last fifteen years which indicates both types of policies are being overused. Unfortunately, expanding government fiscal policy often results in money being poorly spent, or flat out wasted, while leading to high government deficits. 

This comes across as a MMT answer to economic growth which potentially leads to high inflation. An ugly often discounted fact is that it also results in a "bigger" government with a larger footprint. To be clear, since the beginning of 2022, spending on manufacturing construction has soared. It is difficult to tell when this government fiscal spending will run out of juice and slow. Much of this construction is due to a combination of companies re-shoring supply chains as well as government spending. 

When the spending from government fiscal policy slows the economy will most likely also slow. This is especially true if the new manufacturing plants are highly automated and do not create a lot of new jobs. Another factor we face is the cost of products flowing from them may also be higher than those America had been importing from low-cost countries.

These policies are two distinctly different animals. It is important to remember that the growth generated from low-interest rates also has some drawbacks. This takes us to the issue of where is the stimulus coming from. It is very likely that stimulating the economy through monetary policy and stimulus from fiscal spending have different long-term implications for inflation. 

Inflation, disinflation, and deflation are often misunderstood terms and so are the reasons driving them. Part of this comes from the confusion generated by government numbers versus real inflation. Real yields matter, and the government uses a method that tends to promote lower inflation figures or underestimate what we really face. It is only over the long term we can see how different and how bad these trends have become. 

Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)