Monday, September 03, 2007

A Nonprofit Proposal: In Memory of Ebenezer Scrooge before He Became a Lousy Liberal

The Freakwenter Foundation today announces the formation of [plans for] a new subsidiary dedicated to improving the purchasing power of the world's poor. The budding nonprophet, The Ebenezer Scrooge Fund, will achieve its mission through a simple process known to pretty much nobody as "civil monetary policy."

The Ebenezer Scrooge Fund, referred to as "the Fund" for simplicity, faces immense publicity obstacles getting off the ground. The annual publicity allocation is zero dollars and zero cents, and any genuine attempt at publicity is sure to backfire. The workings of civil monetary policy are so counterintuitive (and possibly misguided) that most attempts at indoctrinating the public will result in some combination of laughter and anger.

Here is how The Ebenezer Scrooge Fund works. The Fund accepts donations from regular people and invests all its funds in stocks, financial markets, and direct investment. All investment proceeds go directly back into The Ebenezer Scrooge Fund, and the only outflows are due to administrative costs and investment mistakes such loan defaults. The Ebenezer Scrooge Fund's holdings therefore accumulate rapidly.

With so much money at stake, the administrative guidelines are lengthly to ensure that that the Fund does not become derailed from its original mission. But in terms of day-to-day operation of the Fund, the stated goal is relatively straightforward:
"The Fund shall strive to maximize its medium long-term growth rate while spending no more on public relations than is necessary for basic financial transparency."

So how does the existence of the Fund improve the lives of the worlds poor? We should first explain the term "civil monetary policy."

Economists study national macro economies in terms of two branches of federal policy: fiscal policy and monetary policy. Fiscal policy is how the government spends tax dollars. Monetary policy is how the central bank tinkers with the financial markets and interest rates to promote economic growth and prevent inflation.

Monetary policy to promote rapid short-run economic growth is based on lowering interest rates. The main way this is usually done is by increasing the supply of money in the economy through "open market operations" in which the central bank buys bonds supplied by the free markets.

Civilians who donate to the Fund are therefore conducting monetary policy on a small scale by increasing the publicly available supply of liquidity. This in turn lowers interest rates, promotes economic growth and job opportunities, which in turn increases tax revenue for government social programs.

An obvious criticism of the Fund is that the central bank would already be doing the work of the fund if it were truly feasible. However, people donating to the Fund to lower interest rates is different from the central bank lowering interest rates in several ways.

The most important difference is as follows. When the central bank lowers interest rates by bidding up bond prices, the corresponding bond purchases constitute an increase in the net supply of money in the economy, resulting in destabilizing inflation. That is, the central bank's ability to reduce interest rates is limited. On the other hand, when an individual in the economy donates to the fund, this does not increase the net supply of money, since the donor gives up money and reduces personal consumption in the process, which has a deflationary effect.


Blogger Christopher and Maria said...

Sounds good to me!

6:28 PM  

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