Most Popular
1. Dow Max Drawdown Bear Stock Market 2022 - Accumulating Deviations from the Highs - 21st Feb 22
2.Putin Starts WW3 in Ukraine, Will Use Tactical Nuclear Weapons, China Prepares Taiwan Blitzkrieg - 28th Feb 22
3.World War 3 Phase 1 - Putin WINS Ukraine War! - 25th Feb 22
4.INVESTORS SEDUCED by CNBC and the STOCK CHARTS COMPLETELY MISS the BIG PICTURE! - 10th Feb 22
5.Will There Be A 2024 US Presidential Election? - 3rd Mar 22
6.Gold and SIlver, Precious Metals Sector Is at a Terrific Buy Spot - 6th Feb 22
7.Why Putin Wants the WHOLE of Ukraine - World War 3 Untended Consequences - 6th Feb 22
8.Dow Stock Market Expected Max Drawdown 2022 - 19th Feb 22
9.Stock Market Calm In the Eye of the Inflation Storm - 4th Mar 22
10.M = F - Everything is Waving! Stock Market Forward Guidance - 7th Mar 22
Last 7 days
How Low Could the Amazon (AMZN) Stock Price Fall? - 19th May 22
Bitten by FANG? Clocked by Cryptos? -- 'Air Pockets' Everywhere - 19th May 22
Northern General Hospital Orthopedics Fractures and and Ankle Clinic Consultations Real Patient Experience - 19th May 22
Cathie Wood Goes All in on Teladoc, ARKK INSANE Noob Investing Strategy! - 17th May 22
This is Anything but Positive for US Housing Market - 17th May 22
What Should We Do If There Is No Fed Monetary Policy Pivot? - 17th May 22
All Possible Ways to Earn Free Litecoin - 17th May 22
How low Could the Amazon Stock Price Fall? - 16th May 22
Cathy Wood ARKK INSANITY There is NO Coming Back! - 16th May 22
NASDAQ 100 Stock Market LOWER LOWS & LOWER HIGH - 16th May 22
Sanctions, trade wars worsen US inflation - 16th May 22
AI Tech Stocks Earnings BloodBath Buying Opportunity - 14th May 22
Futures Contract – Trading Crude Oil With USO - 14th May 22
How to Get Kaspersky Internet Security for 80% Discount! Do not Pay Renewal Price! - 14th May 22
Sagittarius A* Super Massive Black Hole Monster at Centre of Our Galaxy REVEALED! - 14th May 22
UK Public Debt Smoking Inflation Gun - 13th May 22
What Happens When the Stock Market Dip Keeps Dipping? - 13th May 22
Biden Seeks Inflation Scapegoats; Gold Advocate Wins GOP Primary - 13th May 22
Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - 12th May 22
The War on Gold Ensures the Dollar’s Downfall - 12th May 22
Crypto Investors Stable Coins TERROR as Terra USD COLLAPSEs towards ZERO, Tether Next! - 11th May 22
INFLATION IS KILLING SILVER - 11th May 22
The Dominant Investing Theme of the Decade - 11th May 22
Is Bitcoin Headed to Zero? - 11th May 22
RECESSION RISKS 2023 - 10th May 22
The Future of the Dollar Seems So Bright It’s Blinding Gold - 10th May 22
Take Advantage When Markets Succumb to Fear - 10th May 22
How to Recognize a Less\ Than Obvious Opportunity (In focus: Corn) - 10th May 22
How to Ensure Financial Stability for Your Family - 10th May 22
The Stocks Stealth BEAR Market - 9th May 22
A Strengthening US Dollar Is A Double-Edged Sword - 9th May 22
Making Wise Investment Decisions - 9th May 22
Ways to legalize a Moving Company - 9th May 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Balancing Lenders and Borrowers is the Most Economically Stimulating

Economics / Economic Stimulus Sep 26, 2012 - 02:42 AM GMT

By: John_Handbury

Economics

Keeping interest rates low has always been perceived to be stimulating.  This is based on the premise that borrowers are more inclined to borrow when rates are low.  This is undeniably true, however, this simplification totally removes the lenders from the equation, which have an equal role in stimulation.

By definition the maximum activity (thereby stimulation) occurs when the number of borrowers is the same as the number of lenders.  By definition this occurs at the MARKET PRICE.  To artificially move rates either way from the market price suppresses either one group or the other and thereby de-stimulates.


Per Economics 101, the total activity of the market is the AREA of the number of sellers (Lenders) times the number of buyers (Borrowers) for any given price.  The area of Rectangle A below, which has much more Borrowers than Lenders, is much smaller than Rectangle B, where the number of Borrowers and Lenders are equal at the market price.

Despite this, Central Banks have artificially lowered rates to essentially zero, and are taking steps such as Operation Twist to also lower longer term rates.  Let’s be clear, no one is going to lend money to anyone at these measly interest rates, especially with the inherent risks in the market at this time.  This is why banks are sitting on trillions of dollars of unused reserves.  Central bankers are blaming the banks and corporations for not lending, but they are simply following risk-reward investing practices, which isn’t going to change for the next few centuries.  If the rewards in terms of yields aren’t there, they ain’t gonna lend – end of story.

This premise cannot be any more evident than the last four years.  Due to market shocks such as Lehman, the US Fed Fund Rate has been lowered to essentially zero to “stimulate” the economy.  Over this time there has also been massive injections into the economy through deficit spending, TARP, bond-buying, and now MBS buying.  You would think the market should be over-heating, in fact boiling.  However we are still seeing the economy in the doldrums and unemployment remains high.  This isn’t new - Japan went through the same process over the “lost decade” of the 1990’s where they lowered rates down to zero without seeing any improvement in the market, in fact just the opposite.

When Central Banks start lowering rates to “stimulate” the economy I (nearly) want to stand on the closest soapbox and yell out loud until they carry me away that what we’re inadvertently doing is DE-STIMULATING by suppressing liquidity and the desire to lend.  What all Central banks should be doing right now is keeping out of the markets and allowing interest rates such as the Fed-Fund Rate to float up to the market price, which is by definition the most stimulating.  Has this been done before?  Yes, the Bank of England in the 18th and 19th centuries, and our own Federal Reserve during parts of the 20th, achieved stable world currencies and low interest rates - but not by managing interest rates. Their credible policies, centered upon currency stability, produced low costs of credit. The Fed can do the same in the 21st century.

John Handbury
Independent Trader
johnhandbury@hotmail.com

© 2012 Copyright John Handbury - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in