Foreword
This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.
Richard Koo, celebrated economist who has worked in the Federal Reserve and is now chief economist at Nomura Research Institute, joins Adam Taggart in this fascinating and detailed look into monetary policy, fiscal policy and central banks.
As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.
If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.
Fiscal policy vs monetary policy
Something which seems to confuse many people — monetary policy and fiscal policy are not the same thing.
Monetary policy is a set of actions taken to control the money supply, typically via interest rates policies and/or reserves requirements of banks. These are typically done by a country’s central bank.
Fiscal policy is the set of actions taken to control the cash flow of a country’s government, e.g. via public spending and taxation policies. These are typically done by the government of a country.
To put it somewhat crudely, monetary policy determines how easy it is to borrow money. It doesn’t mean that anyone actually has to borrow the money. Fiscal policy, on the other hand, determines how much money is coming in or going out of the government’s coffers, and if there is a deficit (i.e. more money going out than coming in), then the balance needs to be borrowed.
To simplify even more, monetary policy makes it easier for the government to borrow money, but fiscal policy determines if the government actually borrows money.
Choice quotes
- In so many countries, especially the United States but others as well, during the period after 2008, when we had the Global Financial Crisis, so many countries adopted, so called, non-conventional monetary easing measures, one of which was Quantitative Easing and even though huge amounts of liquidity was injected, none of those central banks actually met their inflation targets. So that shows that what we learned in universities — that when money supply double the price level will double and all that that Milton Friedman was associated with, was completely untrue after 2008 in the west and actually after 1990 in Japan.
- All the economics that we learn in universities are based on the world that exist in the 60s and 70s, right? But that world doesn’t exist anymore.
Janky Thoughts 