$150 billion stimulus plan announced

[Rajiv]

Re: $150 billion stimulus plan announced

My informal survey of family and friends reveals that most if not all of the rebate money will be used to pay down debts.

I would hope so!

But the bang of the stimulus package does not come from the people who receive the checks -- it comes from the monetization of the bond the Fed floats to write those checks.

[FRED]

Re: $150 billion stimulus plan announced

I would hope so!

But the bang of the stimulus package does not come from the people who receive the checks -- it comes from the monetization of the bond the Fed floats to write those checks.

$150B will not begin to stop the debt deflation bear market.

[Rajiv]

Re: $150 billion stimulus plan announced

$150B will not begin to stop the debt deflation bear market.

Very probably so
However, if the banks can monetize the $150B to the levels I think they will -- it could be sufficient to finance thr green machine -- the "could" depends on how they (the banks) alloocate that new money.

[FRED]

Re: $150 billion stimulus plan announced

Very probably so
However, if the banks can monetize the $150B to the levels I think they will -- it could be sufficient to finance thr green machine -- the "could" depends on how they (the banks) alloocate that new money.

Rajiv, EJ dropped me an email for you:

Rajiv,

The $150B is targeted to consumers to spend in the form of tax rebates. It is not intended to serve as reserves to expand lending through the banking system. This is in my opinion a terrible blunder. Tax rebate checks helped in 2001 but that does not mean they will work this time.

Our writer John Serrapere attended an event at the Pittsburgh Fed today. He just reported to me that investment banker and consultant Chris Whalen gave a key presentation. In it he showed that $3 trillion in funds is no longer available that was until late last year available to small businesses. In fact, it appears that aside from venture capital, which I expect will start to fall off shortly, there are hardly any funds available for the segment of the economy that is most responsible for job creation, especially coming out of recession.

In other words, due to the expanding credit crunch we are getting only the "destruction" half "creative destruction."

I will contact Chris and see if there is any way we can help promote the targeting of government funds to entrepreneurs and small business versus to consumers. If the small business community remains stymied, our economy will be in much bigger trouble than most people realize.

Eric

[Rajiv]

Re: $150 billion stimulus plan announced

Read Stephanie Bell's 1998 paper "Do Taxes and Bonds Finance Government Spending"

It is highly instructive

Abstract:
This paper investigates the commonly held belief that government spending is normally financed through a combination of taxes and bond sales. The argument is a technical one and requires a detailed analysis of reserve accounting at the central bank. After carefully considering the complexities of reserve accounting, it is argued that the proceeds from taxation and bond sales are technically incapable of financing government spending and that modern governments actually finance all of their spending through the direct creation of high-powered money. The analysis carries significant implications for fiscal as well as monetary policy.

High Powered Money

High-powered money is a macroeconomic term referring to the monetary base .
.
.
The monetary base is called high-powered because the magnitude of changes in monetary base can be greatly magnified by the money multiplier. That is, a small change in the monetary base can result in a large change in the overall money supply. As an example, a $1 billion increase in monetary base may lead to a $10 billion increase in the money supply because of money multiplier effects.

Also instructive is David Aschauer's 1990 paqper "IS GOVERNMENT SPENDING STIMULATIVE?"

Of course, Auschauer published this much before Bell's paper.

This paper develops and implements a neoclassical model of fiscal policy. The paper's main empirical hypothesis is that government non-military investment spending is more expansionary than is either government consumption or military investment. The paper utilizes annual data to support the hypothesis. It finds that output "multipliers" for government non-military investment significantly exceed unity while multipliers for government consumption and military investment lie below unity