Pushing On A String

Pushing on a string is a metaphor for the limits of monetary policy and the impotence of central banks. Monetary policy sometimes only works in one direction because businesses and households cannot be forced to spend if they do not want to. Increasing the monetary base and banks’ reserves will not stimulate an economy if banks think it is too risky to lend and the private sector wants to save more because of economic uncertainty.

While the phrase pushing on a string has been attributed to British economist John Maynard Keynes, there is no evidence he used it. However, this exact metaphor was used in a House Committee on Banking and Currency in 1935, when Federal Reserve Governor Marriner Eccles told Congress that there was very little, if anything, that the Fed might do to stimulate the economy and end the Great Depression:

Governor Eccles: Under present circumstances there is very little, if anything, that can be done.
Congressman T. Alan Goldsborough: You mean you cannot push a string.
Governor Eccles: That is a good way to put it, one cannot push a string. We are in the depths of a depression and…, beyond creating an easy money situation through reduction of discount rates and through the creation of excess reserves, there is very little, if anything that the reserve organization can do toward bringing about recovery.

Given that trillions of dollars of quantitative easing (QE) failed to stimulate the U.S. economy as much as expected — even with the federal funds rate at near zero percent for seven years — the pushing on a string metaphor is relevant.

Saving the global economy was left almost entirely to central bankers, but they were unable to magic demand out of thin air because households, burdened with debt, increased their savings rate. Monetary policy has appeared desperate and futile, with the increase in money supply in the U.S. offset by declining money velocity.

When the Fed began its purchases, the U.S. appeared to be in a Keynesian liquidity trap, in which everyone hoards cash rather than spend it or lend it. Household debt fell until 2013, before rebounding to a record $13 trillion at the end of 2017. However, real wages remained flat in the gig economy because asset-price inflation hiked rents.

QE may have staved off disaster — though we will never know how much worse the crisis would have been without it. The multi-trillion dollar question is what happens to consumer spending and business investment as the Fed reduces the money supply and the cost of borrowing rises.