Saturday, December 22, 2018
Ben Holland — The Secret Behind Growth in Trump’s America Is Deficit Spending
MMT gets a mention. Increasingly, the mentions are not negative, just a statement of the MMT position. That's called educating the public.
Looking at the US economy, things are going quite well based on money creation, both through government injection and private credit extension. This is a reason that the Fed is raising rates as part of its reaction function to balance the trend, in addition to its commitment to normalizing after the effects of addressing the global financial crisis swelled the Fed balance sheet with government securities in order to "provide liquidity during a liquidity trap" by increasing the monetary base. (MMT shows why this strategy is wrongly conceived and won't have the desired effect.)
Raising the policy rate is a price increase that has an "inflationary" aspect in addition to a moderating influence by making credit more costly, which eventually has an effect on the housing market. Moreover, return interest bearing government securities to nongovernment increases interest income, which also has an "inflationary" bias.
But the so-called inflationary bias is due to the stimulative effect of these policy choices. There is no problem in absorbing the stimulus when the economy is still in an expansionary phase and is not "overheated," meaning that there is bidding for scarce resources that drives up market prices if the increased demand cannot be met by expanding production to meet the increased demand with increased supply.
The market's reaction seems therefore to be based on irrational pessimism, the opposite of "irrational exuberance on the upside. If this is so, the present market action would be more on the order of correction after a lengthy run up resulting in part from the historically low policy, instead of an indication of an emerging bear cycle or the signal of economic contraction. There are many factors involved in this sudden turn to pessimism with the monetary indicators signaling real expansion without any sign of accelerating inflation at this point. So the motivation is not without basis. However, the discounting seems excessive based on the factors, positive and negative. Again, "expectations."
Market price is based on both subjective and objective factors. The subjective rules in the day to day trading, while the objective — fundamentals, that is, facts — rules in the long run, that is, investing. Warren Buffet has built a fortune on understanding this and using it to pick up bargains at a discount.
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The Secret Behind Growth in Trump’s America Is Deficit Spending