Originally at American Thinker
By Chuck Rogér
Would you lend money to a friend if you thought that there was a good chance that you’d not get all of your money back?
Good friends might make such loans in spite of the lousy prospects for repayment. But what about bankers? Should bankers lend to people in an economic environment in which the repayment dollars will almost certainly be worth less than the lent-out dollars? There is another way to ask the question. When the President of the United States keeps calling for more lending, should lenders lend even knowing that the policies of this same president and the president’s Fed Chief will turn the loans into losing transactions?
At TheFremanOnline.org, Richard Fulmer writes:
A lender would hardly agree to make a $100 loan unless he could reasonably expect to get at least $100 in purchasing power in return. If the government is debasing the currency, loans will be made only if interest rates are higher than the anticipated rate of inflation.
Fulmer has nailed a fundamental problem with using “stimulus” and “quantitative easing” to goose up slow economies. Lenders decide not to lend because inflation’s effects will render the repayments worth less than the money lent. The current Fed’s practice of holding down interest rates only deepens lenders’ losses.
And there will be compounded effects.
When the Federal Reserve Bank injects money into the economy and holds interest rates artificially low, the Fed Chief is essentially asking lenders to pretend that there exist on some economic astroplane the hard goods and services to back up cash that didn’t exist microseconds ago. Intensifying matters, an artificially low lending rate may generate an initial upswing in investment and money flow, but reality must eventually set in.
The golden age will evaporate when it becomes obvious that the capital resources which the Fed Chief asked lenders to imagine were only an illusion. The bubble must burst when it becomes clear that there is immense competition to profit from far fewer goods and services than reflected by the overblown money supply. And the labor to support all the imaginary goods and services isn’t available either, what with there still being 9+ percent unemployment.
As Fulmer points out, “Manipulating markets through monetary policy devalues a nation’s currency, destroys rather than secures property rights, and does nothing to sustain the rule of law constraining both the rulers and the ruled.” Indeed, such governmental manipulation only provides the “illusion of control.” Illusion is certainly what congresses, presidents, and Fed Chiefs perpetrate on the people every time Washington manipulates the money supply, over-borrows, or monkeys around with interest rates.
When Ben reports a total cholesterol count of only 140, the man’s wife praises him for taking care of himself. But the “quantitative easing” which Ben used to halve the actual 280 count has done nothing more than provide his wife with the illusion of good health. Unless removed, the excess cholesterol in Ben’s blood will eventually kill him.
The most bizarre and scary thing I have heard in this regard is Bernanke saying interest rates would be kept low for two years. How irresponsible is that to even make a statement like that? Are we now suppose to factor in zero interest for the next two years? This in effect denies the existence of the time value of money or more accurately it reveals Bernanke’s belief that for interest rates to remain at zero for the next two years, when you factor in the time value (which cannot be ignored) we will actually be in a deflationary period. How convenient for the progressives that the fed chief’s policies and beliefs so coincide with their desire to redistribute through other means. Inflation rewards spenders and penalizes savers. But to predict deflation and have policies that are designed to create inflation at a time when the government is so intent on spending is just too much of a coincidence.
Jon, extremely good insights. Outstanding points on the time value of money. Indeed, not only would businesses be hesitant to borrow as a result of the regime uncertainty and regulatory tyranny, but lenders would be hesitant to lend as a result of the future value of the loan payments being less than what was lent.