Monetary Offset

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People are always enthralled with stories of the man behind the curtain, a force that doesn’t get much recognition, but actually runs the world. I think this is why the Narcos shows on Netflix are so popular.

Enter the ultimate economic version of this, monetary offset. In the last episode of my weekly market and economy recap show, I talked about how Trump is complaining about the Fed.

Monetary offset is the reason why.

We often hear about fiscal policy, whether you are for it or against it, the government spending dollars undeniably has an inflationary effect. However, fiscal policy has an older brother that is actually pulling the strings, and that’s monetary policy. Monetary policy is what the Fed sets, and the Fed has the luxury of seeing exactly what the government is doing with fiscal policy, and then can factor that in when deciding whether to tighten or loosen borrowing conditions.

This is the essence of monetary offset. Of course, if the Federal government pays people to dig holes and fill them back in, that will still happen, so clearly an economy is best served by having both sides doing a good job. However, just one doing a bad job can derail the other, and at the end of the day, the Fed controls inflation because the Fed can offset anything that the treasury does.

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