What is pressing a string?
Pushing the laces was a phrase coined as a metaphor for the central bank’s powerlessness regarding the limits of monetary policy and stimulating the economy.
- Pressing a string means making an effort when it doesn’t help in that particular context.
- In economics, pushing strings was first used to explain that central banks are trying to enact loose monetary policy when the economy is already in a slump, with little or no results.
- Pushing strings has come to be used in the discussion of expanded fiscal policy to take over as the primary means of getting out of the recession.
- The term is attributed to economist John Maynard Keynes, but the phrase appears to have been first used in parliamentary testimony in 1935.
Understand string push
Pushing a string is a more effective metaphor for influence, moving things in one direction rather than in another. You can pull it, but you can’t push it. Monetary policy can only work in one direction, as it cannot be forced to spend when businesses and households do not want it. Increasing the monetary base and bank reserves will not stimulate the economy if banks consider lending too risky and the private sector wants more savings due to economic uncertainty. ..
In economics, pushing a string specifically refers to a situation in which expansive monetary policy is not effective in pulling the economy out of a recession. Since the demand for holding cash is virtually unlimited, the addition of money supply and credit is only added to the cash balance of a financial institution, company, or consumer (or used to repay debt). It will not increase. With aggregate demand or multiplier effect. This situation is known as a liquidity trap, and no matter how low interest rates are pushed up, the market can absorb an unlimited amount of new liquidity into the preventative cash holdings of market participants.
The string-pushing analogy is used as a discussion of expansive fiscal policy to take over as a key tool for pulling the economy out of recession, as these situations neutralize expansive monetary policy to stimulate economic recovery. Will be done. To extend the analogy, if the money supply is a string that the central bank is (failing) pushing, it is fiscal policy to “pull” the other side of the string by directly pushing aggregate demand with a new one. It depends on the planner. Government spending to restore confidence through the multiplier effect and increase private spending on cash balances.
The phrase “pushing a string” is often attributed to British economist John Maynard Keynes, but there is no evidence that he used it. However, this exact metaphor was used in the 1935 US Congress testimony. The Federal Reserve Board of Mariner Eccles is T. Reflecting the words of Congressman Alangorsborough, he said there was little that the Federal Reserve Board could do to stimulate the economy and end the Great Depression.
Governor Eccles: In the current situation, there is little you can do.
Congressman T. Alan Goldsborough: It means that you can’t push the string.
Governor Eccles: It’s a good way to put it down, one can’t push the string. We are in the midst of a recession and there is little that a reserve organization can do to bring about a recovery other than create a simple money situation through lowering discount rates and creating excess reserves.
Press the string example
During the 2007-2008 financial crisis, when early efforts to stimulate the economy seemed to produce little consequences, it was appropriate to push the string metaphor. The Fed has allocated trillions of dollars in quantitative easing (QE) and lowered the federal funds rate to nearly zero percent.
Initially, the Fed didn’t seem to be able to generate demand from thin air due to household budgets.— —I’m in debt— —Increased their savings rate. Monetary policy seemed desperate and wasted, as the increase in the US money supply was offset by slower currency circulation. Therefore, the Fed was pushing the laces.
Household debt declined until 2013, but recovered to a record level of $ 14.15 trillion by the end of 2019. Some believe that quantitative easing and low interest rates could have stopped the disaster, but without these efforts we never know how good or bad the crisis will be.