“How to Tune an Economy and then keep it Fine-tuned – From Macroeconomic to Macro/Micro Monetary Policy Management of the Economy.”
Specifics of Differential Central Bank Interest Rates (difs):
For the case of the US economy, as an example, differential central bank interest rates (difs) would be those rates resulting from extending the present use of the Fed discount and the funds rates for only broad national monetary policy to them being applied additionally by the Fed exclusively to chosen sectors of the economy.
Likewise, adjusting the Fed rates for economically depressed States, Municipalities and Rural Areas.
Also, broadening the traditional use of the Fed rates to check inflation by applying them by States instead of as an overall national measure, thereby insuring their most effective and just results possible.
The Universal Statement of Differential Central Bank Interest Rates (the difs) Proposal:
“That central bank interest rates be extended beyond their present use for only very broad national monetary policy by also being used to specifically influence the economy of the country in all its aspects when Differential Central Bank Interest Rates (difs) can be effectively applied to create growth or used for protection in targeted sectors of the economy of the country, and for growth by states, counties, departments, etc., municipalities and rural areas, and, as per their traditional use, but differentially by states, counties departments etc., in order to achieve their most effective and just results possible”.
Growth and Protection Differential Central Bank Interest Rates (G-difs, P-difs):
The beneficial economic possibilities are all-encompassing.
For example, to stimulate housing, the discount rate for loans for housing can be fixed lower than the overall discount rate (the housing G-dif discount rate), thereby lowering the funds rate (the G-dif housing funds rate), which rates would be the G-dif rates for housing.
Or, to protect certain farm produce from imports, the discount rate for loans for importing those farm produce can be fixed higher than the overall discount rate, thereby raising the funds rate, which rates would be the P-dif rates for such imported farm produce.
Or, to stimulate exports as a whole, the discount rate for loans for exports can be fixed lower than the overall discount rate, thereby lowering the funds rate, which rates would be the G-dif rates for exports.
Or, as in this more elaborated example, to stimulate the automobile industry, the G-dif rate for loans for automobiles can be fixed at the discount rate minus x% of the overall discount rate, thereby lowering the funds rate, AND, at the same time, to protect the automobile industry from foreign imports, the P-dif rate for loans for automobile imports can be fixed at the discount rate plus y% of the overall discount rate, thereby raising the funds rate, which rates would be the G&P-dif rates for automobile purchase and import loans.
Import Tariffs
Odious import tariffs can be done away with in favor of import P-difs, or at least import tariffs can be made less odious with P-difs, possibly by combining them to make import tariffs lower. Imagine all the bureaucracy and costs caused by tariff protectionism which could be eliminated or reduced, as well as the bureaucratic and political corruption of tariff protectionism, all of which would favor the tax payer and therefore the general creation of wealth, and allow for healthier foreign policy and relationships.
Growth Differential Central Bank Interest Rates (G-difs) for Specific States (S-difs), Specific Municipalities (M-difs) or specific Rural Areas (R-difs):
It’s simple enough, if a state or municipality or rural areas is struggling economically, its growth can be incentivized by lowering its discount, and thereby funds rate, in order to boost its spending and investment and thereby create wealth and employment there.
The loans arising from the lower interest rates would be limited to those to be spent in the state, municipality or rural area, not necessarily only to dwellers of those states, municipalities or rural areas, but to all who want to take advantage of the cheaper credit to invest there. Win… win!
Differential Central Bank Check Interest Rates for Specific States (Check-difs):
Again, simple enough, if there are states with higher inflation than the overall national inflation rate, then those states are assigned a higher discount rate than the national rate in order to check their spending and thereby lower their specific inflation rates.
So, if, let’s say, California has a higher rate of inflation than, let’s say, the Rhode Island inflation rate, then little Rhode Island need not suffer the consequences of the higher discount rate which the inflation rate of the huge California GDP is forcing on it via the national inflation rate. And California would have no moral grounds for objecting to the measure.
So, discount rates by States according to their individual needs of having their spending checked, and thereby their inflation rates, is far more just and healthier for the nation as whole and allows for a far more effective and controlled use of the discount rate to manage the overall national inflation rate because spending is being checked where it needs to be checked and not where it doesn’t need to be checked. So, either each state is allotted its discount rate according to its needs to have its inflation checked or not, or once the states needing a higher discount rate to stem their inflation are determined then the discount rate for the rest of the country can be established. A new overall average discount rate can be arrived at for overall specific national applications if necessary.
Inflation fiscal policy arrived at by means of a studies distribution of the discount rate among states, for being just, would give rise to economic stability, certainty and investment security, and all the growth and economic progress for the nation derivable from them.
With the different difs a whole new lexicon of financial policy emerges.
General Observations
The Fed and difs
With dif rates the Fed acquires a new, far broader range of tools for managing and supervising the production and distribution of the currency of the nation and for sharing information and statistics with the public, and, moreover, with promoting employment and economic growth and protecting the economy.
But difs by no means diminish the effects of increasing the discount and or funds rates to stem spending and inflation, or lowering them to boost a flagging economy, rather difs allow control of economic fluctuations to be far more precisely gauged and implemented for being targeted throughout the economy according to sectors of the economy and areas of the country and not just imposing an overall measure regardless of the state of the different sectors of the economy and areas of the country.
Absolutely, because the Fed, by being able to juggle the use of the discount and or funds rates between the economic sectors and areas of the country according to what is best for the country as far as stimulating its economy by sectors and areas of the country, by checking its inflation by areas of the country, or by protecting its economy by sectors from undesirable imports, can exercise a far more informed and stimulating fiscal policy which, as such, allows also for far better currency distribution and more insightful statistics.
Nothing will change regarding the management of the discount and funds rates as such, whereby the discount rate is generally set higher than the funds rate target because the Fed prefers that banks borrow from each other so that they continually monitor each other for credit risk.
Rather, better still, interbank monitoring for credit risks with dif rates would become far more effective for being applied to a cross-section of the economy, thereby opening credit monitoring up to being pin-pointed, because difs would be of specific applications for known sectors of the economy and areas of the country.
The amount of discount lending is very small. It is intended more to be a backup source of liquidity for sound banks so that the federal funds rate never rises too far above its target. The discount rate puts a ceiling on the Fed funds rate. Well, nothing would change here either except that there would be a cross section of discount ceilings for funds rates according to the varying uses of dif rates by sectors of the economy and areas of the country, which, again, allows for a more overall and in-depth understanding of the behaviour and management of the economy at any given time.
To avoid confusion with the already segregated discount rates for primary, secondary and seasonal credits, these are intended for the differently rated depository institutions, but not for application by sectors of the economy.
The application of difs allows for microeconomic analysis and forecasting according to their effects on the sector of the economy and areas of the country targeted for their use. And the analysis of the overall application of difs according to the sectors and areas of the country targeted for their application, in conjunction with the traditional use of the discount and funds rates, allows for macroeconomic forecasting of the whole economy based on the broken down reality of the economy of the country.
Data programs which would allow for future economic planning and contingency measures can be drawn up forecasting the whole economy by economic sectors and areas of the country based on the use of difs.
A Day to day X-ray of the economy can be had where previously there was only a photograph. Indeed, to extend the metaphor, the fiscal management of the economy changes from photography to filming.
Formulae can be drawn up to foresee the overall outcome to be expected for the economy as a whole before applying dif rates by economic sectors and or areas of the country which would allow for dif fine tuning before their being applied, and thereafter.
The Financial Sector and difs
Differential Interest Rates would make banking more competitive by creating diversity of lending and therefore more diverse competitiveness, and, indeed, possibly specialization of banking by economic sectors, which would be very good for those sectors.
Difs would also make of banking a safer business because banking would be working under Fed supervision within established guide lines according to economic sectors, and safer banking makes for safer and more reliable investing, not least also because safer banking makes for a more credible and reliable stock exchange, all of which makes for economic financial stability and confidence, and thereby sound economic growth.
Safe banking and a more reliable stock exchange, along with the finely tuned governing of the economy through the use of difs will make for a strong and confident economy and all the wellbeing thereof.
Implementation of Differential Central Bank Interest Rates
It may seem at first that managing differential central bank interest rates would entail more ground work, but with modern computing systems, once the basic, fairly simple formulae are in place, it would entail no additional work at all, neither for the Fed nor the banks, but rather, those basic formulae will give rise to macro and micro economic formulae intended for the ever greater perfecting of fiscal policy management for the nation.
Security Savings and difs
The drop-off in interest rates for long term security savings will decrease because a decrease in the discount rate to encourage spending, but which also causes savings interests to drop, will no longer be a one and only, all-encompassing measure but will be meted out according to how it can be most effectively used, and savings interests need not ever be lower than absolutely necessary.
So consumer spending can be curtailed to rein-in inflation by lowering the discount rate but consumer savings need only be negatively affected according to what would be the average discount rate reduction as spread out over the economy according to the varying discount rate reductions applied to the different sectors of the economy and areas of the country.
Security Savings and (S-difs)
Further to the immediately preceding, and more importantly so, security savings moneys can be shuffled around the states according to which states have the highest discount rates for being in need of reining in their economies to reduce their inflation.
This would guarantee the best possible results for saving, but it might, in small way, counteract the effects needed by the higher discount rates in that those states would receive the savings capitals for growth investment through their private banking facilities.
Political Implications of difs
The political implications of the use of difs to tune and fine-tune the economy are huge, but at least the Fed will always be there to see that the right thing is done, as far as the Fed is able so to do.
A New Era of Economic Stability, Growth and Progress
Whatever the political implications of difs, their use, as outlined herein, could well launch The US into a new era of even greater economic stability, growth and progress, and relatively so too any other economy, or at least any other economy of the free world.
Conclusions
Difs allow for so much more than what the variations of the discount and funds rates are used for presently, which is basically to stimulate spending by lowering them, or discourage spending by raising them, but which is done throughout the economy as whole and not in a specialized manner.
The use of difs undoubtedly takes central bank interest rates to a new level of operability and implementation with far reaching consequence for the economy, beneficial consequences only, obviously, and therefore the use of difs would lead the Executive and the Fed into a much closer working relationship in order to achieve the best possible running of the economy for the best benefit of all.
Central Bank rates are presently used as macroeconomic tools. The use of dif rates would allow the Fed to combine macroeconomic Central Bank rates with microeconomic dif rates for overall homogenous planning of fiscal policy management for the economy.
Leave Taking
The studied application of specific Differential Central Bank Interest Rates within the whole economy allows for the economy to be tuned as of a specific instance and to be finely tuned thereafter.
Thank you,
Bruce D. Mitchell
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