At some point, the Congress will have to choose between allowing a recession or simply running the printing presses. Even if the US gov’t can borrow, it still must repay and pay interest. Historically, non-US sources of capital have bought our Treasury debt, keeping the scheme rolling.
The Fed is a layer between Congress simply printing and spending money. For private entities, interest rates are a constraint to borrowing. In times of decreased economic activity, money gets borrowed less and is wanted less. Money is a commodity, during economic down cycles it is spent less and produces more interest income as rates rise, cooling off overall growth.
When gov’t simply spends without regard to interest rates, it is forcing itself to borrow to pay interest. The interest might feed to the money center banks that run the Fed but remember they will suffer if there’s too much growth in the money supply. Stagflation may be happening where the supply of money grows, prices goes up, but economic activity in real terms stalls. It’s obviously not enough to feed money into an economy. Even government spending has less and less of a benefit the more that is spent. Like this "stimulus package" if everyone has more money, prices will simply go up so there’s no real net benefit. Now the rich are paying less taxes and therefore accumulate a greater share of the wealth, but the overall economic downturn is punitive to all. Inflation robs middle- and lower-income people more than it does the rich, who are able to shift their capital into higher income-producing assets.
Creating liquidity based on borrowing will only generate artificial demand which must be discounted to show real growth rates. As the scope of the contraction becomes known, real economic activity falls and this can help slow demand for money—hopefully not too much or we could have a depression or economic calamity. Gas/energy costs are going up though and inflation will be higher as a result.
Bernanke has sold out to the idea of preventing a recession so he’s flooded the market with cheap money. This is a sign inflation is rising and will continue to do so, at least thru the elections. A political imperative to maintain growth means more gov’t spending which will increase inflationary pressures unless the economy totally melts. Longer term the debt will spike to pay for all our previous borrowing, curtailing the real rate of US growth for decades.
At some point, the Congress will have to choose between allowing a recession or simply running the printing presses. Even if the US gov’t can borrow, it still must repay and pay interest. Historically, non-US sources of capital have bought our Treasury debt, keeping the scheme rolling.
The Fed is a layer between Congress simply printing and spending money. For private entities, interest rates are a constraint to borrowing. In times of decreased economic activity, money gets borrowed less and is wanted less. Money is a commodity, during economic down cycles it is spent less and produces more interest income as rates rise, cooling off overall growth.
When gov’t simply spends without regard to interest rates, it is forcing itself to borrow to pay interest. The interest might feed to the money center banks that run the Fed but remember they will suffer if there’s too much growth in the money supply. Stagflation may be happening where the supply of money grows, prices goes up, but economic activity in real terms stalls. It’s obviously not enough to feed money into an economy. Even government spending has less and less of a benefit the more that is spent. Like this "stimulus package" if everyone has more money, prices will simply go up so there’s no real net benefit. Now the rich are paying less taxes and therefore accumulate a greater share of the wealth, but the overall economic downturn is punitive to all. Inflation robs middle- and lower-income people more than it does the rich, who are able to shift their capital into higher income-producing assets.
Creating liquidity based on borrowing will only generate artificial demand which must be discounted to show real growth rates. As the scope of the contraction becomes known, real economic activity falls and this can help slow demand for money—hopefully not too much or we could have a depression or economic calamity. Gas/energy costs are going up though and inflation will be higher as a result.
Bernanke has sold out to the idea of preventing a recession so he’s flooded the market with cheap money. This is a sign inflation is rising and will continue to do so, at least thru the elections. A political imperative to maintain growth means more gov’t spending which will increase inflationary pressures unless the economy totally melts. Longer term the debt will spike to pay for all our previous borrowing, curtailing the real rate of US growth for decades.