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Push the rope or pull the rope? This economic metaphor actually reveals the fatal weakness of monetary policy!
In the context of economics, "pushing the rope" is a vivid metaphor used to describe the asymmetry of influence. This concept means that changing the operation of a system is often much more difficult than applying direct pressure. This idea is often used in monetary policy, especially to describe the phenomenon that it is much easier to grow an economy than to slow it down.
"Under the current circumstances, little can be done." - Statement by Federal Reserve Chairman Marina Eccles clearly depicts the limitations of current monetary policy
The roots of the phrase date back to 1935, when U.S. Congressman T. Alan Goldsborough introduced the concept during a hearing to support the views of the Federal Reserve Chairman. In the context of the global economic crisis, economic policies at the time seemed powerless to stimulate economic recovery.
The asymmetry of monetary policy
The asymmetry of monetary policy means that when the economy is in recession, although the central bank can try to promote an economic rebound by lowering interest rates, increasing market liquidity, etc., if people are unwilling to borrow or spend money, these Measures are unlikely to be effective.
"Monetary policy allows us to adjust the speed of the economy, but it does not allow us to force it to move in a particular direction."
According to economic theory, the creation process of money is usually seen as a two-step process. First, the central bank introduces new base money by purchasing financial assets or lending to financial institutions. Next, commercial banks use this base money to expand loans. However, if the demand for borrowing is not strong, this process will be restricted.
Challenges in Recession
In a recessionary environment, commercial banks have become quite cautious and less willing to lend, which has led to the "pushing the rope" metaphor resurfacing. At this point, even if the central bank attempts to strengthen the supply of funds, it may ultimately only lead to an increase in banks' "idle funds" rather than active lending to enhance economic momentum.
"In the middle of a deep recession, when we most hope that monetary policy will be effective, it is when banks are most cautious."
This kind of monetary policy failure is very common in history. Whether during the Great Depression or the 2007-2010 financial crisis, banks and borrowers tend to reject risk-taking behavior when faced with an unstable economic environment. leading to further economic decline.
The impact of excess reserves
As reserves increase in the market, if banks maintain low levels of excess reserves, then the role of the central bank can be to accurately control banks' commercial money supply. However, when banks choose to retain excess reserves, this fails to effectively promote economic growth and instead creates a large amount of idle funds.
This situation has a profound impact on the vicious cycle of the economy, because when funds are not used effectively, the road to economic recovery becomes longer and more difficult.
Thinking about future monetary policy
Of course, in the face of such a difficult situation, should we reconsider and adjust the direction and means of monetary policy? In today's globalized world, policymakers need to find effective countermeasures in a complex economic environment. However, whether effective policies really exist is worth pondering for everyone.
When considering the future direction of monetary policy, we need to think about a question: When facing the challenge of global economic uncertainty, can we find a truly effective way to break the "pushing the rope" dilemma?
