[Issue Briefing] Changes in U.S. Monetary Policy and Economic Instability

Editor's Note

This Issue Briefing is a result of the "Think Tank Joint Research" led by Yeo Si Jae (與時齋) and conducted by EAI with major domestic think tanks. It was originally published on the Yeo Si Jae website on August 21, 2017. In June, the U.S. government announced an interest rate hike, initiating a new economic policy to expand fiscal spending by increasing the money supply. However, many experts argue that this fiscal expansion policy, referred to as "helicopter money," is expected to yield various negative outcomes that deviate from theoretical predictions, given the current U.S. economic situation. Consequently, U.S. think tanks are striving to meticulously analyze the Trump administration's economic policies and their anticipated consequences. They emphasize the need for more prudent policy choices, particularly considering the instability demonstrated by the Trump administration across multiple sectors, including the economy, diplomacy, and politics.

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“The U.S. government, which had maintained low interest rates, announced an interest rate hike in June. South Korea, having escaped designation as a currency manipulator in April and breathed a sigh of relief, now faces the need to devise a response strategy once again. In fact, many view the U.S. interest rate hike policy as having been predictable. For a considerable period, the Obama administration pursued stable financial policies through austerity, but after Trump's election, voices within the Republican Party grew louder, arguing that continued moderate financial policies would weaken the U.S. economic structure.”

“Currently, the United States is implementing an economic policy of increasing helicopter money. Helicopter money is a traditional fiscal and monetary policy where the government increases spending and reduces taxes, while the central bank increases currency issuance to raise banks' cash reserves, thereby expanding the overall scale of fiscal operations. The characteristic of this policy is that it does not begin economic reform by stimulating consumer demand, but rather by the government directly controlling the money supply held by banks to simultaneously adjust the overall supply and demand of currency.”

“In the current U.S. economy, actual investment and desired investment are nearly balanced. This means that investment is occurring wherever resources permit. Therefore, in this situation, even tax cuts for the wealthy are unlikely to stimulate productive investment that would dramatically recover the economy, beyond a short-term increase in non-productive investment.”

“A common problem with growth policies that focus on currency rather than demand, such as helicopter money, is the weakening of banking functions.”

“Conversely, there are arguments that economic revitalization is possible through financial policies alone. A prime example is the experience of Detroit, a region where the traditional automotive industry was in decline.”

“The protectionist economic reforms initiated by Trump in the United States, the world's leading economic power, have provided an opportunity to conduct a major experiment on what constitutes advantageous economic policy for developed nations at this juncture. While many analyses offer negative views on Trump's policies, they simultaneously express skepticism about the low economic growth rates resulting from Obama's eight years of economic policy.”

EAI Issue Briefings provide expert diagnoses and analyses for a correct understanding of major domestic and international issues, along with recommendations for desirable policy directions. EAI strives to provide a balanced perspective and create a platform for constructive policy discussions to generate ideas essential for our society.