In order to make better decisions in life, how does monetary policy effect the interest rates on debt (like credit cards), investments such as stocks and mutual funds, and mortgage rates.
Electronic money, which is the money balance recorded electronically on a "stored-value" card, is also credit, for the balance on the card is a liability of its issuer. The issuer uses funds paid by the card holder to acquire assets. However, the legal evidence of the issuer's liability consists of electronic bits and bytes recorded on the card. For currency, the legal evidence of liability is the piece of currency itself. For bank deposits, the legal evidence of a bank's liability resided for a long time on paper ledger cards or savings passbooks; today, that liability almost always is evidenced by bits and bytes in a bank's computer.
The monetary policy implications of stored-value cards are nil, with one exception. The only policy issue of any significance will be the federal government's loss of "seignorage" income; that is, the interest savings the government earns by issuing non-interest-bearing debt in the form of currency. Using the example cited above, a $10 billion shift in credit from government-issued currency to privately issued stored-value cards would cost the federal government about $600 million annually in seignorage income; that is, its annual budget deficit would increase by that amount because it would have to issue an additional $10 billion in interest-bearing Treasury debt.
The government could recapture some of that lost income by treating the balances outstanding on stored-value cards as the equivalent of checkable bank deposits, which would then subject card balances to a reserve requirement, currently 10 percent in most cases. (Technically, owners of reservable deposits are forced to make an interest-free loan to the federal government that passes through the banks.) That reserves "tax," though, would impede the use of stored-value cards by reducing their profitability to card issuers. Therefore, unless Congress wants to stamp out the widespread use of stored-value cards, increased usage of such cards will add slightly to the budget deficit.
Electronic money will not have any other monetary policy implications because monetary policy today consists entirely of the Fed's interest rate signalling activities, which are discussed below. Contrary to widely held belief, the Fed does not control the money supply, for two reasons. First, the Fed, acting on behalf of the U.S. Treasury, passively supplies whatever quantities of currency that people voluntarily want to ...
How does monetary policy affect the interest rates on debt (like credit cards), investments such as stocks and mutual funds, and mortgage rates?