I've been thinking about this a lot lately. Throughout the history of the Central Bank, they have been able to manipulate the money supply according to their ideas of where the economy should be heading (or where they could make profit). It has been generally observed that when they increased the money supply, times were prosperous and business was booming. Then they would decrease the money supply, and business would be cut off from capital and many would fail.
What is making this time different? The FED is increasing the money supply greatly with the stimulus and QE's. Why isn't business booming. I know capital is not available as banks are not lending, but why? Is it the uncertainty? Is it because we are now in a global economy, and maybe this increased money supply is being focused elsewhere in the world?
Just stuff on my mind that I hope starts a good conversation.
Thanks.
Your assumptions are wrong for the most part. The real economy generally does well when savings are high and therefore that capital is available for investment, and also when the government doesn't interfere with it as much.
The economy appears to do well when we have inflationary bubbles being blown up by Federal Reserve credit, but those "booms" are never sustainable and must bust and allow the economy to shift the resources away from those wasteful endeavors and use them in productive ones.
The problem this time is that for the last 20 or so years, we haven't allowed the economy correct whenever it slowed down. The Fed just kept the easy money and credit flowing allowing us to move from one bubble to the next, and now resources are so misallocated the real economy can't really do anything productive. Also this time we have no savings, and the government is doing everything they can to make sure people spend their money instead of saving it, so there is no capital available for investment. The banks won't lend the newly created money because they are all insolvent unless they make a guaranteed return on that money, so they just take that money and buy treasuries to finance the federal debt. The Fed's easy credit allowed the banks to take wild risks and bankrupt themselves, and nothing is going to save them. They are way too leveraged with bad debt. It would destroy the dollar for good to give them the bailout they need.
Also, this time it is different because the dollar is so weak. We haven't had a productive economy for a long time. We have kept the printing presses going for too long already, and now prices are rising every time Bernanke blows a fart. The consumer is crushed with every bailout. We have stagflation with a perilously weak currency.
There are only 2 options. They keep printing and borrowing and trying to centrally plan a solution. This will lead to hyperinflation, probably within 10 years. The other option is to raise interest rates, which will bankrupt the federal government, liquidate the bad debt, and suffer through a severe correction while the free market figures out the best way to allocate resources and put people back to work. Guess which one they will opt for.
