Trying To Increase Investment And Consumer Spending In The US Economy

Trying To Increase Investment And Consumer Spending In The US Economy

Crowding In is the new mantra that the US government may be trying to use to boost the US economy. The more commonly used term in economics is crowding out, where government borrowing program sucks liquidity out of the economy and raises interest rates. This leaves less money at the hands of private investors for investing and leads to crowding out of private investment. Effectively, the government and the private sector compete for funds. The US Fed seems to be attempting exactly the opposite at this point of time. By buying government paper, the US Fed is leaving more money at the hands of private investors to either spend or invest.

The US fed believes that crowding-in can lead to increase in the investment and consumer spending in the US economy, thereby providing another round of stimulus. Increasing money supply in the economy by this methodology is also likely to stave off the chances of deflation as now there will be more money chasing the same number of goods and services, which is likely to put an upward pressure on prices and this should prevent any downward fall in the prices. More money at the hands of private investors could also potentially lead to an increase in investment activity and hopefully improve the employment numbers. The unemployment in the US has been close to 10% for a considerable period now.

However, the US has faced considerable flak from other economies on its move to buy around US $600 billion worth of government paper. Such a massive injection of liquidity into the US economy is likely to increase money supply and lower the value of the US dollar. A weaker US dollar makes US exports more competitive and nations like Germany have attacked the US for its easy money policy leading to a weakening of the US dollar. However, the US Fed has denied any intention to weaken the US dollar and has stated that the objective of this exercise is to provide a boost to the US economy. The Fed further added that the move aimed at stabilizing prices and boosting the US economy are the twin tools to provide long term strength to the US dollar. Thus, one could witness a short term weakness in the dollar, and if the policy moves lead to the strengthening of the US economy, a stronger dollar could be the result in the long run.

The US Fed has also clarified that the move to purchase government paper does not amount to monetizing of debt as it is not indulging in purchase of new treasuries. Purchase of new treasuries would have meant funding of government deficit and would have amounted to monetizing debt. Effectively, the Fed has put more money in the hands of private investors now and can reverse its policy decision, once the economy gains traction. The move is also likely to weaken the US dollar in the short term, which is reflective of the state of the US economy. A reversal of the current policy decision once the US economy flexes its muscles, could make the US dollar stronger, quite in line with the underlying strength of the US economy.

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