This post discusses why monetary and fiscal policy require certain economic conditions to be present if they are to be successful in raising real GDP. In this article I explain the interaction of monetary and fiscal policy inside an aggregate economy framework which can be visualised in 3 dimensions. This 3D shape morphs over time and its shape is very much influenced by 'demand-side' government and central bank policy. I will however hopefully explain how it is 'supply-side' economics which is, at this present time, more important than the demand-side.

Money and debt

First, a short explainer on money and debt since it is important to understand how the expansion of money and credit in the economy does not necessarily create demand. In this section we discuss the 'money supply' which acts as potential demand in the economy. This is 'demand-side' economics.

Let's run through some examples of the creation of debt to see what impact each has on demand.

If my son borrows £10 from me, this does not increase the money supply but it may lead to an increase in current demand versus saving. Since no new money has been created (unfortunately it's not within my powers to create money), only a transfer of assets, the money supply remains constant. If I was going to spend the £10, it does not increase demand in the economy since my son spends the money but I need to defer my spending of that £10 until it is returned to me.... (More)

I would like to propose a thought experiment...I literally thought of this 10 minutes ago, so it's a rough draft: In order to stimulate the economy out of recessions/depressions, what if every citizen was given equal amounts of fiscal stimulus cash AND an equivalent debt payment credit at the same time (on regular intervals). It may or may not require an expiration date...not sure yet. I assume it would have to be a central bank cryptocurrency or something like that to make this work...because if the person receives the cash 2 months before the debt credits arrive, then it fails. Maybe a mandatory sign up for direct deposits would be okay, however.

To clarify, the debt payment credit is essentially the same as the cash, but it can only be spent paying off debt. The idea behind this is based on the fact that paying off debt, in a vacuum, is deflationary because it removes currency from circulation if new loans are not being made at the same pace [Fractional banking system 101].

So giving people exactly the same amount of cash and debt payment credits, in theory, would be a net neutral impact on total currency in circulation...leaving the fractional banking system alone to impact money supply like in the past.

At the consumer level, we can simultaneously provide people with cash to spend into the economy, and credits to alleviate debt burdens...a healthy velocity of money improves...growth returns...suffocating debt burdens are relieved. The poorest of the poor finally... (More)