Why some people say that once rates hit 0%, the central bank starts to "push on a string"

[Daal]

US rates are at 0%, the Fed is doing QE. QE is boosting the money suppply (both the monetary base as well as M2)

Nominal GDP = M2 * Velocity

While the Fed can't control velocity (although they can have some impact on it through their speeches) they have proved that they can control M2.

So the Fed can boost nominal GDP and prices through this mechanism. How is that pushing on a string? This is the very thing the Fed failed to do in the 1930's as Real GDP and prices collapsed (so Nominal GDP collapsed and people couldn't service their debts, causing further problems)

 

[Amatrue]

When there is more money supply, velocity would go down. So they kinda cancel each other out.

 

[morganist]

US rates are at 0%, the Fed is doing QE. QE is boosting the money suppply (both the monetary base as well as M2)

View attachment 244983

Nominal GDP = M2 * Velocity

While the Fed can't control velocity (although they can have some impact on it through their speeches) they have proved that they can control M2.

So the Fed can boost nominal GDP and prices through this mechanism. How is that pushing on a string? This is the very thing the Fed failed to do in the 1930's as Real GDP and prices collapsed (so Nominal GDP collapsed and people couldn't service their debts, causing further problems)

Just optimize your pension system, 'Pension Pump' or use 'Pension Fund Easing'. The other saving mechanism pension saving.

 

[morganist]

When there is more money supply, velocity would go down. So they kinda cancel each other out.View attachment 245059

Is that accurate? Most economists would argue an increase in money supply will increase the velocity of transactions.

 

[piezoe]

Is that accurate? Most economists would argue an increase in money supply will increase the velocity of transactions.

It is accurate in this case. The fed pumped money into the economy to to keep the service sector afloat. This had the desirable effect of compensating for a syeep drop in velocityrescue compensate for a steep drop in velocity. Once the vaccine arrives, the service sector will recover, velocity will pick up and the fed will start withdrawing money from the private sector to compensate and to control inflation.

 

[Amatrue]

Is that accurate? Most economists would argue an increase in money supply will increase the velocity of transactions.

Because interest rates and inflation are so low, the opportunity cost of spending is also low. Which is why people aren't inclined to spend and are instead saving/hoarding money, thus money velocity is at historic lows. All the money pumped into the markets is just being saved by people.

 

[morganist]

Because interest rates and inflation are so low, the opportunity cost of spending is also low. Which is why people aren't inclined to spend and are instead saving/hoarding money, thus money velocity is at historic lows. All the money pumped into the markets is just being saved by people.
View attachment 245081

But it is Christmas, the time when everyone spends.

 

[Amatrue]

But it is Christmas, the time when everyone spends.

You are RIGHT! Santa please give us some inflation

 

[NoahA]

All the money pumped into the markets is just being saved by people.

Although some is being saved, these charts from Wolfstreet beg to differ. Spending on durable goods has exploded, and even the services sector is already recovering.

https://wolfstreet.com/2020/11/25/the-state-of-the-american-consumer-free-pandemic-money-runs-low/

The real shocker is income. The government came in nicely to make sure money didn't run dry. As it is, most are probably doing better now than before the crisis, at least for now. Combine this with some people not paying rent, and you can see people are flush with cash.

But of course, income from wages hasn't fully recovered yet, but its shockingly close. In 2021, if there is no more stimulus, and when the evictions and back rent can commence, it will be interesting what will happen then. But its obvious that the whole problem has been nicely papered over.

 

[piezoe]

Sorry. Please disregard my post #5 above. It should read as follows:

Is that accurate? Most economists would argue an increase in money supply will increase the velocity of transactions.

It is accurate in this case. The fed pumped money into the economy to keep the service sector afloat. This had the desirable effect of compensating for a steep drop in velocity due to the economy's service sector being largely shut down. Once the vaccine arrives, the service sector will recover, velocity will return to normal, and the fed will withdraw money from the economy as needed to dampen inflation.