Remarkable insight for those confused by the money trade;
From: ahhaha of 10779
Several months ago I made the distinction between public and private loanable funds. The sturm und drang is occurring in private loanable funds and their disposition, not in public loanable funds which appear in two markets: Tpaper, fed funds.The latter constitute the means to implement monetary policy and therefore determine how economy is financed.
The interplay between Tpaper and fed funds is complex. Somehow or other the two leak out and become the basis upon which the balloon of private debt oriented finance expands and contracts. In recent decades private finance has become ever more self financing. It doesn't need public funds now as a basis as it did over most of US history. This has the consequence of lessening FED's ability to control the economy, and its control of abuse within the private sector's financing activities.
The abuse is now expressed as high interest rates on private money where high is anywhere between 6 and 20 percent. Meanwhile FED keeps public money cheap so the effect on high rates of interest on private money minimally impact the economy. One has to remember that monetary policy determines the economy, not the disposition of the terms on private financing, if only because most of private financing is associated with RE rather than investment productive capacity as was the case throughout US history until 1990. RE generates almost no output, so it does not matter much except to RE speculators what the cost of money is in the private market. RE financing isn't much involved in the servicing of transactional credit that's critical to industrial production and general economic activity. Public money is.
Public money forms the basis of monetary policy, so when public money is made artificially cheap, monetary policy is easy, and price can rise without commensurate production. Equivalently, cheap money means money supply rises without proportional rise in output. More money but not more goods, or cost of goods is allowed to rise which leads to rise in prices. Result: inflation with high rates on private money. However, cheap public money doesn't do much to relieve the natural correction to greed in the private financing sector.
FED must raise the price of public money to slow inflation, or rate of interest on public money will go through the roof because lenders won't lend to the public, to government. Why not? Because FED undermines the face value of future money by fixing a negative real rate. This wouldn't be a problem in a free market for money. Since FED has fixed an artificially low rate some aspect of economy is excessively stimulated. The stimulation causes other prices in unassociated areas to rise. Eventually, rising prices force labor to raise their price for compensation. Voila, spiral. FED can't let a spiral to start to any degree. Doing so, allowing any degree, causes lenders to withdraw from lending to government. When FED raises fed funds rate the gap between private and public cost of funds narrows, inflation is busted, and confidence is restored. |
