Printing Money Lowers Interest Rates
Printing money lowers interest rates. The central bank of the USA, the Federal Reserve (Fed), is trying to suppress interest rates to keep Americans solvent. They are killing the dollar.
The dollar (Federal Reserve Notes) used to be gold and silver coins. Paper Federal Reserve Notes (look at the top of a paper dollar) could be exchanged for the metal dollars. Now the dollar is just numbers printed on paper and computer screens.
The advantage of paper money for government spending is that the Fed can always just print money and loan it to the government.
“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.“ -Former Federal Reserve Chairman Alan Greenspan, Meet the Press, August 7, 2011.
Printing money lowers interest rates through supply vs demand. Lenders want to be paid the highest interest rate possible and borrowers want to pay back the lowest interest rate possible. If there are more lenders than borrowers, or if the lenders have more money than otherwise, then borrowers will be able to find a lender offering a lower interest rate than their competitor. Printing money increases the amount of money that can be loaned than otherwise, thus lowering interest rates (see the second half of the article for details).
Importantly, lowering interest rates creates bubbles (booms). Bubbles are investments (stocks, housing, bonds) which are affordable to borrowers with lower interest rate loans but which are unaffordable with higher interest rate loans. When interest rates rise, bubbles pop.
“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” -Ludwig von Mises, Human Action, pg. 570.
Because of the progressive increase in the size of government beyond the available taxes, if the Fed stops loaning the Federal government money, then people who depend on the government for their income (government employment, welfare, stimulus) will lose their money, interest rates will rise, and the bubbles will pop.[1][2]
“The U.S. has always paid its bills on time, but the overwhelming consensus among economists and Treasury officials of both parties is that failing to raise the debt limit would produce widespread economic catastrophe. In a matter of days, millions of Americans could be strapped for cash. We could see indefinite delays in critical payments. Nearly 50 million seniors could stop receiving Social Security checks for a time. Troops could go unpaid. Millions of families who rely on the monthly child tax credit could see delays. America, in short, would default on its obligations.” -US Treasury Secretary Janet Yellen, former chairman of the Fed (2014-2018), in opinion piece written for the Wall Street Journal, Sept 19, 2021
“I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.” -Jerome Powell, Chairman of the Federal Reserve, then member of the Board of Governors, Oct 2012 Federal Open Market Committee Meeting.
However, printing money also makes it worth less. More people with more money trying to buy the same good or service will try to outbid each other and raise prices. Overtime, unending stimulus runs into the same price inflation problem.
“We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power.” -Fed Chairman Alan Greenspan, US Senate Committee on Banking, Housing and Urban Affairs, Feb 16, 2005.
The Fed is stuck between a rock and a hard place. Either the Fed acts as the lender of last resort and the dollar becomes worth less and worthless, or it stops printing money, raises interest rates, dries up the supply of affordable loans, and causes defaults on a record scale.
So the Fed will keep printing money to delay the inevitable rise in interest rates. That is because, while interest rates do tend to decrease to reflect the increased supply of loans, eventually, when lenders realize that inflation is a deliberate policy that will go on endlessly, lenders will raise interest rates to reflect the money becoming worth less after the loan is repaid. If you loan out $100, get back $110, but now things that cost $100 cost $150 because everything costs more, then you are poorer even though you have more money.
They can’t print gold.
“Gold is a currency. It is still by all evidences the premier currency where no fiat currency, including the dollar, can match it.” - Alan Greenspan, in an interview for the Council on Foreign Relations, Nov 2014
The rest of the article explains how the Fed technically lowers interest rates to kick the can down the road.
The Federal Funds Rate is the interest rate that depository institutions (major financial firms/big banks/too big to fail) pay each other for an overnight loan. It influences all other interest rates, particularly for US government bonds.
To lower the Federal Funds Rate, the Fed prints money and buys US government bonds from big banks. The big banks that sold the bonds then won’t need an overnight loan, resulting in the Federal Funds Rate going lower as other big bank lenders offer the loan at a lower rate to attract big bank borrowers.
Per fred.stlouisfed.org,[3]
“The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. (1) The rate that the borrowing institution pays to the lending institution is determined between the two banks; the weighted average rate for all of these types of negotiations is called the effective federal funds rate.(2) The effective federal funds rate is essentially determined by the market but is influenced by the Federal Reserve through open market operations to reach the federal funds rate target.(2)
The Federal Open Market Committee (FOMC) meets eight times a year to determine the federal funds target rate. As previously stated, this rate influences the effective federal funds rate through open market operations or by buying and selling of government bonds (government debt).(2) More specifically, the Federal Reserve decreases liquidity by selling government bonds, thereby raising the federal funds rate because banks have less liquidity to trade with other banks. Similarly, the Federal Reserve can increase liquidity by buying government bonds, decreasing the federal funds rate because banks have excess liquidity for trade. Whether the Federal Reserve wants to buy or sell bonds depends on the state of the economy. If the FOMC believes the economy is growing too fast and inflation pressures are inconsistent with the dual mandate of the Federal Reserve, the Committee may set a higher federal funds rate target to temper economic activity.”
Setting the Federal Funds Rate ensures that big banks/major financial firms will loan the US government money because they know that the Fed will then buy the US government bonds from them. It also keeps interest rates low on US government bonds. That is because the Fed will buy US government bonds at lower interest rates than any sane investor would consider. Instead of the US taxpayer either defaulting and/or paying higher interest rates on the debt, the Fed instead acts as the lender of last resort. That affects all other interest rates because the paper dollar is the world’s reserve currency.
The Fed buys US government bonds from the big banks because it is illegal for the Fed to buy bonds directly from the US government as that inflation would be too alarmingly obvious for the ignorant public.
Per federalreserve.gov,[4]
“The Federal Reserve Act specifies that the Federal Reserve may buy and sell Treasury securities only in the ‘open market.’ The Federal Reserve meets this statutory requirement by conducting its purchases and sales of securities chiefly through transactions with a group of major financial firms--so-called primary dealers--that have an established trading relationship with the Federal Reserve Bank of New York (FRBNY). These transactions are commonly referred to as open market operations and are the main tool through which the Federal Reserve adjusts its holdings of securities. Conducting transactions in the open market, rather than directly with the Treasury, supports the independence of the central bank in the conduct of monetary policy. Most of the Treasury securities that the Federal Reserve has purchased have been ‘old’ securities that were issued by the Treasury some time ago. The prices for new Treasury securities are set by private market demand and supply conditions through Treasury auctions.”
Buying US government bonds adds to the Fed’s Total Assets (see the Fed’s Total Assets graph below).
The Federal Funds Rate came about because banks had only been required to reserve about 10% of the money that they claimed people had deposited and then they were free to lend out the rest (fraud 101). If the big banks did not hold 10%, then they were supposed to get an overnight loan from another bank, the interest on which is called the Federal Funds Rate.
In effect, this makes all Federal Reserve member banks into one giant bank that is moving money around the country to hide how little money the banks actually have on hand.[5]
However, on March 15, 2020, the Fed announced that by March 26 there would no longer be any reserve requirements! Banks can loan out 100% of the money that they claim you have deposited. That is inflationary.[6]
Prior to March 2020, the Fed had been paying banks interest for their required reserves and for their excess reserves, known as the Interest On Required Reserves (IORR) and Interest On Excess Reserves (IOER). The IORR and the IOER were only recently created because of the Great Recession in 2008, which started in Dec 2007.[7]
On July 29, 2021, the IOER was replaced with the Interest On Reserve Balances (IORB). In fact, all reserves are excess reserves so big banks get paid interest to not fraudulently loan out the money that they claim as deposited.[8][9][10]
So while the Federal Funds Rate is no longer necessary, it is still used to lower the interest rates on US government bonds.
Next, the Fed and big banks also trade Repurchase Agreements (Repos) and Reverse Repurchase Agreements (Reverse Repos) to control interest rates. Repos and Reverse Repos are opposite sides of the same trade.
From the perspective of the Fed, a Repo is when the Fed loans money to big banks overnight in exchange for government bonds as collateral (increasing the amount of money in the economy and lowering the repo rate).
A Reverse Repo is when the Fed uses the government bonds already in their total assets (which they had originally bought from big banks to set the Federal Funds Rate) as collateral for an overnight loan from a big bank. Reverse Repos reduce the amount of money that big banks could use to invest and inflate asset prices by instead having them loan that money to the Fed in exchange for a comparably attractive, high interest rate. If the loan is not repaid by the borrower, then the collateral is forfeited to the lender.[11]
Per fred.stlouisfed.org,[12]
“Temporary open market operations involve short-term repurchase and reverse repurchase agreements that are designed to temporarily add or drain reserves available to the banking system and influence day-to-day trading in the federal funds market.
A repurchase agreement (known as repo or RP) is a transaction in which the New York Fed under the authorization and direction of the Federal Open Maker Committee buys a security from an eligible counterparty under an agreement to resell that security in the future. For these transactions, eligible securities are U.S. Treasury instruments, federal agency debt and the mortgage-backed securities issued or fully guaranteed by federal agencies.”
Again, per Fred.stlouisfed.org,[13]
“Temporary open market operations involve short-term repurchase and reverse repurchase agreements that are designed to temporarily add or drain reserves available to the banking system and influence day-to-day trading in the federal funds market.
A reverse repurchase agreement (known as reverse repo or RRP) is a transaction in which the New York Fed under the authorization and direction of the Federal Open Market Committee sells a security to an eligible counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future. For these transactions, eligible securities are U.S. Treasury instruments, federal agency debt and the mortgage-backed securities issued or fully guaranteed by federal agencies.
For more information, see https://www.newyorkfed.org/markets/rrp_faq.html”
On September 17, 2019, because the Repo Rate skyrocketed over the previous days, the Federal Reserve responded by loaning out money to big banks to suppress the Repo Rate (Not QE). The US government was also in the process of going into historic debt by spending a historic amount of money. In the opinion of the author, this caused the government to need an excuse for all the inflation and unemployment that would result.[14]
The excuse for politicians was the covid lockdown. If we are in a lockdown, then we aren’t in a depression because we can “return to normal” if we just obey. Instead of blaming politicians for our impoverishment, politicians could be heroes and blame our problems on those who don’t comply. Fear is a powerful tool.
Lately, the Fed has been engaging in the Reverse Repo market.[15]
The Fed does not need to engage in reverse repos to get a loan because the Fed can print money whenever they want; so, they are only doing reverse repos to keep big banks from investing more of the newly printed money in the rest of the economy and thus inflating prices further.
The Fed is stuck between a rock and a hard place: Either the Fed prints money, keeps asset prices high with lower interest rates, and risks making the dollar worth less as general prices rise, or it raises interest rates, dries up the supply of affordable loans, and causes defaults on a record scale.
Printing money lowers interest rates. The Fed is trying to keep interest rates low to keep Americans solvent. They are killing the dollar.[16]
[1]https://www.hamiltonmobley.com/blog/august-15-1971
[2]https://www.hamiltonmobley.com/blog/r9tu385c22azkxuycdia7o3kludljh
[3] https://fred.stlouisfed.org/series/FEDFUNDS
“The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. (1) The rate that the borrowing institution pays to the lending institution is determined between the two banks; the weighted average rate for all of these types of negotiations is called the effective federal funds rate.(2) The effective federal funds rate is essentially determined by the market but is influenced by the Federal Reserve through open market operations to reach the federal funds rate target.(2)
The Federal Open Market Committee (FOMC) meets eight times a year to determine the federal funds target rate. As previously stated, this rate influences the effective federal funds rate through open market operations or by buying and selling of government bonds (government debt).(2) More specifically, the Federal Reserve decreases liquidity by selling government bonds, thereby raising the federal funds rate because banks have less liquidity to trade with other banks. Similarly, the Federal Reserve can increase liquidity by buying government bonds, decreasing the federal funds rate because banks have excess liquidity for trade. Whether the Federal Reserve wants to buy or sell bonds depends on the state of the economy. If the FOMC believes the economy is growing too fast and inflation pressures are inconsistent with the dual mandate of the Federal Reserve, the Committee may set a higher federal funds rate target to temper economic activity.”
[4]https://www.federalreserve.gov/faqs/money_12851.htm
“The Federal Reserve Act specifies that the Federal Reserve may buy and sell Treasury securities only in the ‘open market.’ The Federal Reserve meets this statutory requirement by conducting its purchases and sales of securities chiefly through transactions with a group of major financial firms--so-called primary dealers--that have an established trading relationship with the Federal Reserve Bank of New York (FRBNY). These transactions are commonly referred to as open market operations and are the main tool through which the Federal Reserve adjusts its holdings of securities. Conducting transactions in the open market, rather than directly with the Treasury, supports the independence of the central bank in the conduct of monetary policy. Most of the Treasury securities that the Federal Reserve has purchased have been "old" securities that were issued by the Treasury some time ago. The prices for new Treasury securities are set by private market demand and supply conditions through Treasury auctions.”
[5]https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-banks.htm
[6]https://www.federalreserve.gov/monetarypolicy/reservereq.htm
“As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.”
[7]https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm
“The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve Banks to pay interest on balances held by or on behalf of depository institutions at Reserve Banks, subject to regulations of the Board of Governors, effective October 1, 2011. The effective date of this authority was advanced to October 1, 2008, by the Emergency Economic Stabilization Act of 2008.”
[8]https://fred.stlouisfed.org/series/IORR
[9]https://fred.stlouisfed.org/series/IOER
“Starting July 29, 2021, the interest rate on excess reserves (IOER) and the interest rate on required reserves (IORR) were replaced with a single rate, the interest rate on reserve balances (IORB). See the source's announcement for more details.”
[10]https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210602a.htm
“The Federal Reserve Board announced on Tuesday the approval of a final rule amending Regulation D to eliminate references to an interest on required reserves (IORR) rate and to an interest on excess reserves (IOER) rate and replace them with a single interest on reserve balances (IORB) rate. The final rule also simplifies the formula used to calculate the amount of interest to be paid on such balances and makes other minor conforming amendments. The final rule adopts the rule proposed by the Board on January 8, 2021 without change, and takes effect on Thursday, July 29, 2021.”
[11]https://www.hamiltonmobley.com/blog/risky-debt
[12]https://fred.stlouisfed.org/series/RPONTSYD
“Temporary open market operations involve short-term repurchase and reverse repurchase agreements that are designed to temporarily add or drain reserves available to the banking system and influence day-to-day trading in the federal funds market.
A repurchase agreement (known as repo or RP) is a transaction in which the New York Fed under the authorization and direction of the Federal Open Maker Committee buys a security from an eligible counterparty under an agreement to resell that security in the future. For these transactions, eligible securities are U.S. Treasury instruments, federal agency debt and the mortgage-backed securities issued or fully guaranteed by federal agencies.”
[13]https://fred.stlouisfed.org/series/RRPONTSYD
“Temporary open market operations involve short-term repurchase and reverse repurchase agreements that are designed to temporarily add or drain reserves available to the banking system and influence day-to-day trading in the federal funds market.
A reverse repurchase agreement (known as reverse repo or RRP) is a transaction in which the New York Fed under the authorization and direction of the Federal Open Market Committee sells a security to an eligible counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future. For these transactions, eligible securities are U.S. Treasury instruments, federal agency debt and the mortgage-backed securities issued or fully guaranteed by federal agencies.
For more information, see https://www.newyorkfed.org/markets/rrp_faq.html”
[14]https://www.hamiltonmobley.com/blog/not-qe
[15]https://www.hamiltonmobley.com/blog/bmpoa42hdx6sasuqv21sr2vwh9gob1
[16]https://www.hamiltonmobley.com/blog/not-worth-a-continental
