FW: Fed vs White House

["Forstater, Mathew" <ForstaterM@xxxxxxxx>]

I agree Gary. It used to be said that "deficits cause high interest
rates" when the myth was still that the money supply was exogenous and
interest rates were endogenous. Even after it was clear that the Fed set
short term rates exogenously, there were still occasionally articles in
the papers on the same day, one that said "Fed considering rate hike"
and another that "Deficits may result in rising interest rates". But now
it's been switched  to "deficits cause high *long term* interest rates."
We can't have it both ways unless we want to look as petty political as
the petty politicians, becoming deficit hawks when the 'other' party is
running deficits and deficit doves when 'our' party is running them.
(By the way, Eisner's argument was that if there is any relation between
deficits and interest rates, causality runs the other way--high interest
rates cause higher deficits through the higher interest payments on the
debt.)

Functional finance is an alternative to both the hawk and the dove
views.  Deficit spending results in a net increase of reserves in the
banking system, which puts a *downward* pressure on interest rates; the
pressure is eased when the government drains the reserves through bond
sales.