[ad_1]
“Pushing a string” refers to the futility of government attempts to stimulate demand in an economy suffering from deflation. Lowering interest rates may not increase demand, as consumers may maintain their previous lack of interest in increasing consumption levels.
The term “pushing a string” is attributed to John Maynard Keynes, a renowned British economist. The phrase was used in reference to monetary policies that governments could employ to stop or stop a deflation in the economy. Deflation is the opposite of inflation and means that there is a marked reduction in the demand for goods and services during consecutive business cycles. Such low demand is just as undesirable as excessively high demand, because both affect the economy negatively.
To address this imbalance, the government can use tactics such as raising or lowering interest rates. In the case of perceived deflation caused by declining consumer confidence, the government may lower interest rates in the hope that such a move will entice consumers to spend more. If consumers take the bait and start spending more as a result of low interest rates, this will give the economy a much-needed boost by raising Gross Domestic Product (GDP) and thereby reversing deflation.
Such an outcome is the result of demand and supply factors in the economy. When the demand is high, the production rate will increase to keep up with such increase in economic activities. According to John Maynard Keyes, government manipulation of the economy by raising interest rates does not guarantee that consumers will respond by increasing their demand for products. Where there is no demand, the movement can be compared to an impulse on a string.
Pushing a string is a metaphorical reference to the fact that an object attached to a string can only be moved by pushing the string away from the object. Pushing the string in the direction of the object will have no effect on the position of the object. As such, the “push-a-string” theory implies that manipulative monetary policies, such as raising interest rates, are an exercise in futility if the target consumers do not respond to the interest rate reduction by increasing demand. Like the momentum of a chain effect, consumers still maintain their previous lack of interest in increasing consumption levels despite low interest rates.
Typically, low interest rates will allow banks to lower the interest rates they charge on loans. Such a reduction will encourage consumers to borrow more money for purchases such as houses, cars and other items. Following the impulse of a string theory, such a reaction from consumers is not always the case.
Smart Asset.
[ad_2]