The Future of Interest Rates Lock them Now!
Howdy Readers. In today's two part series I'd like to begin to explain, what I believe to be a very difficult topic. That task is to explain why the Federal Reserve Bank's huge infusion of money into the banking system will end up causing double digit inflation and interest rates, not unlike the seventies.
In September 2008 the Federal Reserve began a phase to drastically increase the monetary base. The monetary base is made up of currency in circulation, member bank reserves held at the Fed, and vault cash. They increased the monetary base by almost $1 trillion. This percentage increase is the largest in the past 50 years by a factor of 10!
The currency-in-circulation component of the monetary base (which, prior to the expansion was 95% of the monetary base) has risen by a little less than 10%, while the bank reserves have increased almost 20 fold. Now the currency-in-circulation component of the monetary base is less than 50% of the whole thing.
This means that bank are holding huge reserves of money. What do banks do with this money? They find way to lend it. Tune in tomorrow and I'll explain why the huge reserves the bank will be lending out over the next two years will cause skyrocketing interest rates and inflation.
