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CENTRAL BANK, DEFICITS & INTEREST RATES by Warren Mosler
The "federal deficit" is when the government spends more than it taxes. And when government spends a dollar, there are only two possibilities. Either that dollar is used to pay taxes and is lost to the economy, or it remains in the economy as what we call "monetary savings." And so the government deficit - dollars spent by the government and not yet used to pay taxes - is in fact our monetary savings. And so this explains why the businesses and households in the economy are able to save so much. In fact, government deficit spending adds exactly that much to our savings, to the penny, as any government accountant will confirm!
So this means that when the Fed lower rates, the Treasury pays less interest to the economy on its debt, and that means less income for the economy. In other words, with the economy on balance a big saver, lowering rates removes interest income and therefore acts much like a tax increase, and this hurts the economy.
Fortunately, there are very "user friendly" ways to offset this interest income lost to the economy. These include tax cuts or public spending increases. The choice is political, as either alone or in combination can easily be sized to make sure the economy has enough income to sustain high levels of output and full employment. In fact, the problem today is that, for the size government we have, along with the low interest rate policy, the economy is grossly overtaxed and starved for income.
The remedy is quite simple.
https://www.usnews.com/debate-club/should-the-federal-reserve-keep-interest-rates-low/federal-reserve-interest-rates-should-be-at-zero-forever
The "federal deficit" is when the government spends more than it taxes. And when government spends a dollar, there are only two possibilities. Either that dollar is used to pay taxes and is lost to the economy, or it remains in the economy as what we call "monetary savings." And so the government deficit - dollars spent by the government and not yet used to pay taxes - is in fact our monetary savings. And so this explains why the businesses and households in the economy are able to save so much. In fact, government deficit spending adds exactly that much to our savings, to the penny, as any government accountant will confirm!
So this means that when the Fed lower rates, the Treasury pays less interest to the economy on its debt, and that means less income for the economy. In other words, with the economy on balance a big saver, lowering rates removes interest income and therefore acts much like a tax increase, and this hurts the economy.
Fortunately, there are very "user friendly" ways to offset this interest income lost to the economy. These include tax cuts or public spending increases. The choice is political, as either alone or in combination can easily be sized to make sure the economy has enough income to sustain high levels of output and full employment. In fact, the problem today is that, for the size government we have, along with the low interest rate policy, the economy is grossly overtaxed and starved for income.
The remedy is quite simple.
https://www.usnews.com/debate-club/should-the-federal-reserve-keep-interest-rates-low/federal-reserve-interest-rates-should-be-at-zero-forever
