I know that in economic models it’s easy to explain, but in real life how does it work? How do buying bonds and lowering interest rates actually cause more people to have jobs? What is the chain reaction?
In: Economics
It is not really about bonds and interest rates as much as it is about the increased circulation of money.
See, one of the things that happens when economies dip is that people stop spending as much money. They pinch pennies. This reduction of the money supply can have a negative feedback loop where the economy dips so people pinch pennies, which causes the economy to dip some more which cause more people to pinch, etc etc etc.
By lowering interest rates and such, what you’ve done is essentially have a clearance sale, except the clearance sale is the whole country. And poor or not, people love a clearance sale! **And this is the key to the whole process**: keeping people spending money means that sources of production (stores, services, etc) keep doing steady business. And if they are doing business, they need workers. And if workers are employed, then they are making money, *and then they go forth and spend that money*, and the whole circle of life keeps spinning.
For a counter example, let’s look at austerity measures and why it is so god damn fucking stupid to implement in a recessive n (fine during a boom). Seriously, it’s fucking HORRIBLE in an economic recession. Why? For the opposite reason stimulus is good: it promotes money being taken out of circulation.
Austerity contracts the money supply, and makes it more difficult for people to spend spend spend. And if no one buys, then no one produces. And if no one produces, there is no need to keep him or her employed. No jobs means even LESS spending, and the circle of life grinds to a halt.
So to make it easy to remember, stimulus in a bad economy to speed it up, and austerity in a good economy to slow it down and keep a steady momentum.
Hope that helps. Especially the next time you hear a politician speak.doea he or she say we have to cut spending when there is a recession? *Then do not vote for that fucking dipshit*. Likewise, do they enact stimulus when the economy is firing on all cylinders? Like how that fucking cocksucker Donald Trump slashed taxes in the middle of a boom when he should have been RAISING taxes to recoup revenue lost during the last recession that was also caused by Conservatives? Then don’t vote for that asshole either.
By lowering interest rates, we make it cheaper for companies to borrow. The cheaper it is for a company to borrow, the more investing (via borrowing, buying hardware, hiring people, and paying back the debt in the long term) the company can do, and the more widgets the company can make and sell.
Cheap *short-term* borrowing is really important for big businesses, because it’s usually easier and cheaper to borrow overnight than to keep oodles of cash lying around. Ask me about the 2008 recession and GE Credit if you want a horror story. Again, cheaper loans = more investment = more jobs.
Meanwhile, if I want to buy a house or a car, it’s cheaper for me when interest rates are lower. The cheaper it is for me to borrow money, the more likely I am to buy a car/house. This also applies to credit card purchases of luxury goods (laptops, TVs, etc.). In turn, when I buy lore stuff, I increase demand for stuff, and that causes suppliers to increase output or allow the price to rise (more profits, in theory).
I’m not sure about bonds.
They don’t. The best known way to stimulate the economy and create jobs is to give money to poor people, who will immediately spend it on goods and services they need.
What quantitative easing accomplishes is creating stock market bubbles. Economists who advocate for it have made the fatal error of confusing the stock market for the economy. If stock prices are rising, that means more value exists in companies, who can therefore spend that money on hiring people, but they don’t do that. Best case scenario is they use that money to automate jobs away. Worst case is it vanishes into various shady funds connected to who-even-knows-where.
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