The Money Dam: Why the Fed is paying to keep the money stagnant



Since the 2008 financial crisis and the advent of quantitative easing (i.e. the Fed creating massive amounts of money out of thin air to pump into banks) by the Federal Reserve MASSIVE and I mean MASSIVE amounts of money have been pumped into the financial system.


Why was this done?

Well what happened was there was a credit crunch, basically the banks and financial institutions were holding money, not lending it out since everyone else was being hit by pullouts and they wanted to have ample cash reserves to be able to handle that if they occurred to them and not end up like Lehman Brothers.  So what happened was that EVERYONE was holding onto cash and NO ONE was lending even to the most trustworthy of borrowers.  There was also a crunch in the daily cash borrowing in capital to other banks and mega corporations.  See basically companies like GE don’t always have the cash on hand during a day to cover expenses to they actually borrow from other companies and financial institutions to cover the cost, this is done at an extremely low rate and it is paid back in short time usually within a day.  On other days GE will have extra cash on hand and they lend it to other companies etc etc. for the same reasons.  Well this market froze up as well even though there was little to no risk in doing this.

So the Fed in its infinite wisdom decided to floooooood the markets with cash, giving banks and financial institutions BILLIONS AND BILLIONS AND BILLIONS of dollars in the hopes that banks would lend to other companies and specifically individual borrowers to help ease the credit market, spur borrowing, lending and payments, etc.  basically it was marketed as a jumpstart to the hear to the heart of the financial market.

Well this didnt happen exactly which is why it was so hard to find a loan in recent years until recently, so what does this all mean?



(This chart shows the money sitting in reserve in banks)

What happened was the banks and institutions held onto the money and DIDN’T lend it out like they were hoped they would (There was never a legal contract drafted by the government that banks HAD to lend out the money).  So the banks held onto it, So what?  well what that did was create a massive amount of money in reserve in banks around the world (massive amounts of money were sent to foreign banks as well).  This money sat there, however there is a concept call “Velocity of Money”, so what does that mean?

Velocity of Money

This is a economic concept that means is the “frequency with which a unit of money is spent on new goods and services produced in a period of time”, the amount of economic activity associate with a given money supply.  Basically its how money is spent and re-spent in a economy, so if there’s a crap-ton of money sitting around the velocity of that money is zero but once it starts being spent it grows exponentially.

This basically means that when all that money starts to move in the economy and move from savings to spending (lending and investing) it will start a reaction that severely inhibits the value of that money.


Why do I bring this up?  Well in a recent article they talk about how the Fed is paying banks to not spend the money? doesn’t this go against what the Fed wanted in the first place, that is for banks to put this out into the market?  Well yes it does, they wanted them to, but now if that money is released you will see a much greater increase in the cost of products and services (that is anything you buy or need).

That is why the Fed is paying the banks to park this money.  If this starts to move we will see $30 cans of soup very quick.  This illustrates why we need to continue to prep, the world as we have grown to know it is at the brink of collapse.

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