Most important comment in this, and thank you for saying it ......KEEP INFORMED!........so many do not. There will not be many small banks standing when this is over.
Question: How could the Fed suddenly afford to pay 5.5%? Is it because they can just print it? But that confuses me because this was supposedly a "tightening" move, which presumably would be dis-inflationary. My head is spinning.
Thanks, Al. Yes, of course they "print it." But it's "presumably dis-inflationary" because this money doesn't get lent out. The Fed pays banks higher interest to keep their funds parked, so the cash stays put—that's the incentive.
Economic expansion is stilted by slowing down lending and the incentive for business expansion by borrowing is curtailed by higher interest rates. But would the printing by the Fed to pay more to banks eventually catch up with them? Maybe that’s why we have cycles?
I think Peter Schiff discussed part of this issue in his most recent podcast. The banks are now reliant on the Fed's rates as one main way to make money rather than loaning out capital to entrepreneurs and businesses. That is a negative for the economy as a whole since it disincentivizes the creation of new businesses which create jobs, etc.
Yes, and the rate raise in 2022-3 was very swift. Now the rates are being lowered a little bit, but the Fed is between a rock and a hard spot, so they can’t go much lower without risking runaway inflation.
You also have to remember that the Fed is currently sitting on significant losses from the Treasuries they bought when interest rates were lower—about $1 trillion, I think. While it's not a problem for the Fed because it's not constrained like a regular bank, other banks that are sitting on those losses could go under if there's a bank run—Silicon Valley Bank and Signature Bank come to mind.
Anybody familiar with the book The Great Red Dragon? This explains a lot about how we got here.
https://www.alor.org/Storage/Library/PDF/Moolfolk%20LB%20-%20great_red_dragon.pdf
Most important comment in this, and thank you for saying it ......KEEP INFORMED!........so many do not. There will not be many small banks standing when this is over.
Brilliant analysis - thanks.
Question: How could the Fed suddenly afford to pay 5.5%? Is it because they can just print it? But that confuses me because this was supposedly a "tightening" move, which presumably would be dis-inflationary. My head is spinning.
Thanks, Al. Yes, of course they "print it." But it's "presumably dis-inflationary" because this money doesn't get lent out. The Fed pays banks higher interest to keep their funds parked, so the cash stays put—that's the incentive.
Economic expansion is stilted by slowing down lending and the incentive for business expansion by borrowing is curtailed by higher interest rates. But would the printing by the Fed to pay more to banks eventually catch up with them? Maybe that’s why we have cycles?
I think Peter Schiff discussed part of this issue in his most recent podcast. The banks are now reliant on the Fed's rates as one main way to make money rather than loaning out capital to entrepreneurs and businesses. That is a negative for the economy as a whole since it disincentivizes the creation of new businesses which create jobs, etc.
Yes, and the rate raise in 2022-3 was very swift. Now the rates are being lowered a little bit, but the Fed is between a rock and a hard spot, so they can’t go much lower without risking runaway inflation.
You also have to remember that the Fed is currently sitting on significant losses from the Treasuries they bought when interest rates were lower—about $1 trillion, I think. While it's not a problem for the Fed because it's not constrained like a regular bank, other banks that are sitting on those losses could go under if there's a bank run—Silicon Valley Bank and Signature Bank come to mind.
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Hell most of the big banks are STILL offering like . 1% for savings accounts.