COVID-19 and Hot Money Credits

July 15, 2020

This 14-minute podcast was released July 15, 2020.

David Andolfatto, senior vice president and economist

“If the economy gets stuck in this kind of psychological trap, the idea is how might the government help kick-start this type of situation to get people out of these doldrums,” says David Andolfatto, senior vice president and economist at the Federal Reserve Bank of St. Louis. He talks with Laura Girresch, manager of media, social media and analytics, about how a hot money credit program could help kick-start the stalled economy as a result of the COVID-19 pandemic.



Laura Girresch: Welcome to Timely Topics, a podcast series from the St. Louis Fed. I’m your host, Laura Girresch, and today I’m speaking with David Andolfatto, economist and senior vice president at the Federal Reserve Bank of St. Louis. David, thanks for joining me today.

David Andolfatto: Very happy to be here, Laura. Thank you.

Girresch: In your latest On the Economy Blog post which is titled “Hot Money Credits to Kick-Start a Stalled Economy,” you describe what you call a hot money credit program as a potential solution to kick-start a stalled economy. Let’s talk about this concept a bit. What is a hot money credit program? Is it new? If it’s not new, how does it work in existing examples?

Andolfatto: Yeah, well, you know, the idea came from, you know, just reading some historical documents. I know John Maynard Keynes talked about this in The General Theory. And it was an idea actually, it also, the famous American economist Irving Fisher actually wrote a short book on it called Strip Money which is basically the same idea. The idea is in fact much older. It actually kind of goes back to the 19th century. But the basic idea is if — and this is a big if — if we diagnosis a problem or the problem in the economy, it’s kind of like stalled out for some reason. Kind of the way it was in the depths of the Great Depression in the early 1930s. The idea is that there’s not necessarily anything fundamental that’s kind of holding back the economy, but that it’s kind of, more of like a kind of psychological phenomenon, kind of like people are just afraid. Firms are afraid to invest. Workers are afraid to spend their money because they’re not sure about whether they’re going to have a job. And people start saving a lot. You know, building up precautionary money balances to kind of brace against this era of uncertainty. That because it’s the case that any person’s spending is another person’s income, the idea is that if, collectively, if the community is afraid to spend that this is going to manifest itself as no income for anybody. So, it kind of becomes a bit of a self-fulfilling prophecy. So, if the economy kind of gets stuck in this kind of psychological trap, the idea is how might the government help kick-start this type of situation to get people out of these doldrums. The classic sort of Keynesian prescription for this diagnosis is for the government to go and maybe start some public works project. You know, employ a large number of individuals to do certain things. And that’s certainly one possibility. Kind of a drawback with that sort of a large government intervention is that it’s not always entirely clear where the government should be spending its money or where to direct these workers to work on what projects. And so, another idea is, you know, why not kind of distribute a cash transfer. Kind of very much like what the government did recently in the CARES Act. You know, delivering to households or each member of the household $1,200, for example. So, the idea there is that we can trust individuals to kind of have a better idea as to where to direct the spending. That’s kind of one idea for why a cash transfer might be desirable in these types of situations. The problem is if the diagnosis, though, is this kind of self-fulfilling depression, the idea is that the cash transfer might not end up being spent. It might end up being saved. Kind of defeating the purpose of distributing the cash transfer to begin with. So, a number of economists, and indeed even non-economists, kind of propose this idea of one way to motivate households or individuals who receive these stimulus checks. One way to motivate them to spend them in a coordinated manner is to attach some sort of expiry date to this money. And so, basically, it would work very much like a coupon with an expiry date. And, so, imagine that you receive $1,000 or $1,200 in your bank account or on some sort of card with the condition that these monetary credits are going to expire if they’re not spent, say before the end of the month. So, that’s the basic idea. That the expiry date serves as kind of this implicit tax. It’s going to really motivate people to kind of get rid of this money. And the idea is that if everybody is motivated to get rid of this money right away, that this collectively — it’s going to result in such a large, collective increase in the demand for goods and services that firms are going to be motivated to hire workers to kind of fulfill these demands, these needs. And this is kind of the idea. That somehow this is the way in which we can collectively kick-start the economy out of this kind of depression.

Girresch: Okay. Interesting. So, could you contrast that with a hot topic right now? Negative interest rates.

Andolfatto: Well, actually some people have pointed out that this idea does bear some relationship to the idea of negative interest rates. So, the idea of negative interest rate policy is in fact exactly that. Is to kind of try to kick-start an economy that’s in a depressed state by making savings kind of more costly and thereby promoting spending. So, that’s the whole idea behind lowering interest rates in general or even lowering them into negative territory. The idea that it’s supposed to be temporary, and it’s supposed to kind of coordinate people to start spending rapidly to kind of kick-start an economy that’s otherwise stalled out. So if the monetary credit is due to expire at the end of the month, for example, you can interpret that as a very, very negative interest rate. So, that’s the sense in which the two proposals are related. One reason why I like the hot money credit better than negative interest rates is because the negative interest rate policy tends to apply to all of our savings. Everybody’s savings, for example. You know, you can expect the savings in your bank account to go negative and for obvious reasons a lot of people are going to be very resistant to that idea. Especially people who want to save for legitimate reasons obviously. So, a negative interest rate policy suffers from that problem. That it acts as a tax on everybody’s savings. The hot money credit program that I’m talking about can be thought of as a negative interest rate policy that applies only to the cash transfer that the individual receives. So, it’s not like a tax on their accumulated savings. It’s actually a threatened tax on the new money transfer that the government is gifting to them. And so, I’m thinking that that type of negative interest rate policy would be much more politically palatable and acceptable and, therefore, more likely to succeed.

Girresch: Okay. That makes sense. So, in your view when would we use a hot money credit program?

Andolfatto: Well, that’s a good question. You know, it’s like anything, it would require that the diagnosis be correct. That we are able to diagnosis the situation as being one where the economy is stalled out for psychological reasons and not necessarily for fundamental reasons. This is, for example, not a program that you’d want to apply in the COVID crisis necessarily because in the COVID crisis we actually wanted people to stay home, for example. We didn’t want large parts of the economy to go to work. But once the crisis, the COVID crisis passes and then the question is whether people will be fearful of spending their money once the economy reopens, right? This is going to require the situation to be diagnosed correctly by policymakers. There’s a lot of uncertainty surrounding that, but that’s something that policymakers always have to face. But I think you can kind of see the telltale signs. You have to keep monitoring the data. I mean, if you see that consumer spending remains depressed, if recruiting intensity remains depressed, if job openings remain depressed, and if there’s no obvious fundamental reason for why these activities should be depressed. These are the situations where I think a hot money program might reasonably be implemented.

Girresch: Okay. So, what would it take for a program like this to be successful and are there barriers to ensuring that success?

Andolfatto: Well, yeah. I mean, I guess, not just with this program but with many government transfer programs, I think one thing that would really help in ensuring success is to make sure that all Americans and all American households have access to the U.S. banking system. You know, there’s still a significant number of households in the United States that do not. And we can see these problems even with conventional transfer programs with the so-called stimulus checks, still to this day have not reached a number of people in need. Mainly, I guess, because they’re not hooked up to the banking system or don’t have accounts with the IRS, for example. So, as a prerequisite to ensure success it would be great to have accounts for everybody. Perhaps central bank digital currency accounts, for example. Something that I’ve advocated for as well. So, these accounts are electronic and so that these accounts can be credited, basically in a very short order and so people would have access to these funds very, very rapidly. And, the expiry date could be made very short as well to kind of promote spending. Technologically the way this could work is very easy because the credits can be made to disappear just by a keystroke, for example. And so, it would be very easy to kind of motivate people to spend the credits before they expired. So, that would be one prerequisite is to make sure that everybody is hooked up. And, other than that, I think that in terms of success, I don’t see anything really hampering the potential success of the program apart from certain perhaps political resistance for a variety of reasons.

Girresch: Okay. So, what would you like listeners of the podcast and people who read your blog post to take away from the research?

Andolfatto: Well, yeah, you know I think that actually just as a way of thinking about things is the notion that much of macroeconomics has to do with understanding how our modern-day living standards depend so much on the coordination of economic activity. I mean, we saw this very clearly during the crisis. The importance of the supply chains, for example. I mean, it’s a miracle in some sense that every grocery store has bananas, for example. I mean, how does that happen? I mean, the underlying relationships and networks and technology is just really a miracle of coordination and cooperation. And one of the magical things about, you know, economies like the United States is that we don’t have any central planner in charge, right? We don’t have anybody kind of dictating who’s to manufacture a certain bolt or screw or screwdriver or where the food is supposed to come from. All of these decisions are made in a decentralized manner. And there’s a lot of benefits to having a decentralized system like that, right? People have talked about this, of course, before the merits of free enterprise — decentralized decision making. There are great benefits to a system like this. But it also exposes the system to the possibility of what economists call coordination failure. And this idea of coordination failure is, I think, kind of the main lesson that comes from John Maynard Keynes’s General Theory. That is, Keynes understood, kind of, the merits of a decentralized system but he also understood in a way that I don’t think a lot of his contemporaries did, the possibility for these large decentralized systems to sometimes kind of get stuck and coordinate on socially undesirable outcomes. And this idea of a self-fulfilling depression where individually it makes sense for you to build up precautionary savings. Individually it makes sense for you to protect your family, to build up savings and to reduce your spending. But it could be that collectively the decision doesn’t make sense. So, what is individually rational does not necessarily correspond to what is collectively rational. And I think that this is the great insight of a general theory. I think it’s a great insight about one of the problems of macroeconomies coordinating macroeconomic activity, and I think it gives you a good idea as to what the potential role is for government to help ensure that the economy — a decentralized economy doesn’t get stuck in these types of traps, and if it does get stuck, kind of what sort of things a government can do to help the economy emerge from these traps while at the same time letting the broader economy harness its entrepreneurial spirit and decentralized structure to deliver the living standards we are accustomed to.

Girresch: Well, David, this has been great. Thanks so much for your time today. I think you’ve raised a lot of really important points and certainly given us a lot to think about.

Andolfatto: Hey, Laura, thanks a lot. It’s been fun talking to you.

Girresch: To read the full blog post visit and for more Timely Topics podcast episodes visit You can also subscribe to our Timely Topics podcast series on Apple Podcasts, Stitcher, and Spotify. Thank you.

Economists and experts talk about their research, topics in the news and issues related to the Fed. Views expressed are not necessarily those of the St. Louis Fed or the Federal Reserve System.

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