Useful definitions

A number of terms are used throughout this blog. For the sake of brevity, I do not explain them every time. They are:

Neutral Money/A Neutral Monetary System — the new monetary system proposed in my book that I believe would end unemployment and inflation without the need for central bank or government stimulus.

The Ideal Interest Rate — that magical rate (or more realistically: set of rates) that drives demand to a level consistent with full employment and stable inflation. Put another way, savings matches borrowing at full employment.

The Actual Interest Rate — that rate (or more realistically: set of rates) that the central bank targets or manipulates.

When the actual interest rate = the ideal interest rate, the economy achieves full employment and stable inflation.

When the actual rate is below the ideal rate, the economy experiences above-target inflation.

When the actual rate is above the ideal rate, the economy experiences unemployment and below-target inflation.

Secular Stagnation — the ideal interest rate is negative when the government budget is balanced. Since the actual interest rate cannot turn negative in the current monetary system, the central bank is unable to achieve full employment and stable inflation without government deficit spending.

Borrowing Demand — the amount of borrowing that would occur in an economy at any given interest rate. Note that borrowing in this sense only encompasses productive uses, be it for investment or consumption. It does not refer to non-productive activities such as borrowing to buy stocks or bonds.

Savings Supply — the amount of saving that would occur in an economy at any given interest rate. Note that savings means the portion of income that is not spent by the original income earner. For instance, a worker who doesn’t spend $100 of their $1,000 monthly wage saves 10% of their income.

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