“Money” is an article…a short article at that, which lays out the facts. Facts in fact, free of politicians’ baloney. It’s worth a read. If you can’t be bothered, (It IS your money going down the drain) here’s the short version:
Your Federal Reserve loans money to banks at what amounts to interest-free rates. That does a couple of things. One you don’t hear about is, it prevents retirement plans that provide pensions (mostly government plans, these days) from earning enough from safe investments to pay those pensions. Which is a big reason so many city and county and even some state pension plans aren’t adequately funded. How do you earn enough from safe bond investments when interest rates are held so low?
Another is, it allows those borrowing banks to sit on the money instead of lending it out, since it’s costing them so little. And the risks of lending these days, are not small. Would you lend at low rates against substantial risk? Neither will the bans; if you face more risk, you need more interest. And when too many are out of work and owe too much, risk goes up. Demand for loans goes down, too.
So, some 81 % of the money the Fed has obtained from the air and loaned to the banks, sits idle; it’s not loaned out by the recipient banks because they can’t earn enough from it to cover the risk of lending it. Anyway, the line of would-be borrowers in this moribund economy is short. So as you’ll see in the graph of money velocity (turnover) most of the Fed’s funny money is just sitting in the banks.
When the banks do start dumping that money into the economy, the larger number of dollars it creates will be applied to an actual wealth that hasn’t increased, so the dollar price of items of wealth will rise; that’s called inflation.
The Fed wants to suck up its funny money and pull it from the economy before that can occur. Last time it did that big time, it brought on the famous Great Depression of the 1930’s. So it needs to be careful. In history, kindly note that it nor any central bank has been that careful. (Just so you know.)
So where that leave us, is ths:
1. The Fed can keep adding money to the banks in the delusion that it’s adding it to the economy, until so much money is sloshing around an unchanged (and even, shrinking) amount of actual wealth, that we end up in a reprise of the Weimar Republic. That one went south via inflation, you may Google it. Or,
2. The Fed can raise interest rates (the actual cost of money) and thereby bankrupt the governments that have to pay such interest on their borrowings. (Which governments are, by virtue of their deficit spending, already bankrupt.) Oh, and destroy the banks while at it.
In olden days, this was called a “Hobson’s choice” (You may Google it) but the gist of it is, on one side is a rock and a hard place sits on the other.
We’ve had it, we’re just awaiting reality’s arrival. When an emotional swing next drops a major stock market by enough to get attention, you’ll see it.
But you aren’t gonna like it…
You can hope this is wrong, best do that. And hide a few bucks and some odds and ends of value under the mattress. Won’t hurt if you don’t need them…
The photo is from the Great Depression. The only reason you don’t see these scenes now, is food stamps, disability payments and what’s left of unemployment compensation. But those, remember, are being paid by deficit spending… money the government actually doesn’t have. What’s next?