Monetary vs Fiscal Stimulus


Because I have an MBA (in addition to working in SQL Server and Power BI and because I am interested in the financial analysis side of things), a few people have asked me to explain the difference between Monetary and Fiscal stimulus when it comes to the way the federal government is fighting to keep our economy from falling into a depression at this time of the Coronavirus. So, let me give it my best shot.

Monetary stimulus is often associated by changes by the U.S. Federal Reserve to the interest rates charged to banks for loans. The theory being that as interest rates are lowered by the Federal Reserve, those banks in turn will make more money available to business, especially small business at lower rates. If this occurs as expected, it may help to keep small businesses which our country relies on from going out of business because they cannot otherwise pay their debts, their employees, and the cost of materials they need to conduct business. The Federal Reserve, I believe, can even now buy corporate debt to help those businesses survive.

Fiscal stimulus on the other hand consists of tax cuts, unemployment benefits, credits, government spending on infrastructure (which we could probably use) and even direct payments to individuals and families such as those checks many of you have recently received. This is money directly to individuals, not businesses. This is an entirely different tool than Monetary stimulus.

Still don’t see the difference? Think of it this way, Fiscal stimulus is the direct transfer of money from the federal government to the public through one or more different methods with no expectation of getting that money back. Yes, this increases our national debt and will someday in some way have to be repaid. If the economy soars, this can be done through normal fiscal methods without undo taxing of businesses and individuals would could hurt the economy. Only the spending on infrastructure has some ‘public’ return in the form of perhaps better roads, repaired bridges, and updated water and sewer lines. The rest of the fiscal stimulus is simply a hand out of money in the hope that people will pump it back into the economy to buy goods and services that they might not have bought before. If people just put it in their savings accounts, it will not help at all which is why most fiscal stimulus plans phase out as individual or family income rises.

On the other hand, Monetary stimulus does not simply hand out money. It is effectively money used for loans to business which the government expects to paid back at some time in the future. Even when the Federal Reserve buys corporate debt, they expect that debt to be paid back at some time in the future. Monetary stimulus also does not apply typically to individuals the way Fiscal stimulus does.

So, I hope that helps you understand a little about what is going on in the news these days. This will eventually all pass and we can get back into Power BI features and capabilities.

By sharepointmike Posted in Finance

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