To assess the shift in fiscal and monetary contributions to U.S. money creation over the past five years, we can calculate the Fiscal Dominance Index (FDI) for March 2020 and compare it to the recent value. The FDI ranges from 1 (entirely fiscal-driven) to 10 (entirely monetary-driven).
Data from March 2020:
Fiscal Contribution:
In response to the COVID-19 pandemic, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, amounting to approximately $2.2 trillion.
Monetary Contribution:
The Federal Reserve initiated Quantitative Easing (QE4) in March 2020, purchasing assets to support liquidity. By July 2020, the Fed's balance sheet expanded by $3 trillion, increasing from $4.2 trillion in February to $7.2 trillion.
Calculating the Fiscal Dominance Index (FDI) for March 2020:
Using the formula FDI = 10 × (Monetary Contribution %) / (Fiscal Contribution % + Monetary Contribution %):
Fiscal Contribution %: ($2.2 trillion / $5.2 trillion) × 100% ≈ **42.3%**
Monetary Contribution %: ($3 trillion / $5.2 trillion) × 100% ≈ **57.7%**
Plugging these into the formula:
FDI = 10 × (57.7%) / (42.3% + 57.7%) ≈ 5.8
Comparison:
March 2020 FDI: 5.8 (indicating a slight monetary dominance)
Recent FDI: 5.2 (indicating a slight fiscal dominance)
Interpretation:
Over the past five years, there has been a shift from a slight monetary dominance in money creation to a slight fiscal dominance. This change reflects the evolving roles of fiscal and monetary policies in influencing the U.S. money supply.
Considerations:
These calculations provide a simplified view and may not capture all nuances of fiscal and monetary interactions.
Other factors, such as changes in money velocity and private sector credit creation, also affect the money supply but are not included in this calculation.
This comparison illustrates the dynamic nature of fiscal and monetary policies in shaping economic outcomes over time.
