To quote the urban poet, Notorious B.I.G., “I don’t know what they want from me, it’s like the more money we come across, the more problems we see.” As we stand on the precipice of the Federal Reserve Bank’s monetary policy reversal, a truer quote could not be made.
In the accompanying chart, the blue line shows how much the Feds have grown their balance sheet post-2009 recession (aka, quantitative monetary easing). This was to spur economic activity and launch the U.S. towards higher GDP growth. To this end, we’ve seen GDP growth (chart – green line) of 34% and a 62% increase in commercial bank loans (chart – orange line), since June 2009. Meanwhile, the velocity of money has declined -16.6%, as Fed assets have ballooned 114%.
So, even though the Feds have thrown Trillions of dollars striving to ignite the economic engine of the U.S., the more money they’ve thrown at the problem has not translated into the robust targeted broad-based economic benefits.
On the plus side, lending has improved, but nowhere near the rate that the Fed would like. Banks need to lend more, but currently they have little incentive to do so, given the revenues from their excess capital reserves. Therefore, the Fed wants to drive market interest rates higher. It’s the only way to move the needle forward on economic activity, as bank coffers open to financing business activity.
To the negative, monetary velocity (shown in chart – red line), which is the rate at which a dollar moves through the economy from buyer-to-seller-to-buyer, has been deteriorating consistently post-recession. Improving bank lending to businesses and consumers at favorable rates and terms would help accelerate this rate. Again, such an occurrence is only going to happen when it pays banks favorable margin to allocate their money to loans instead of excess capital reserves, which is again dependent on higher interest rates.
Having more money, as the great poet knew, is not such a wonderful thing intrinsically, but rather how you, and those around you, make best use of that money.
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