In the United States, since the 1980’s, there has been a growing reliance on easy money, more specifically, easy debt. And one path to easy debt is “Debt monetization.” Debt Monetization has been used to fuel short-term bursts of economic growth at the expense of long term savings, investment and capital formation. This trend in monetary policy has contributed to the wealth inequality, populism and polarization we see today. Europe and Japan have similar monetary policies. And debt expansion has been noticed in other parts of Eurasia, but I will stick with the US today.
Debt, like stocks, can be bought and sold in capital markets. Debt monetization is when the Central Bank (Federal Reserve or the Fed) creates money -- magically 'poofing' it into existence -- and uses that money to buy debt from commercial banks. The Fed then removes that debt from circulation by storing it on its balance sheet (illustration above). Now, the Fed has the debt, and the banks have the money. When that debt is no longer in circulation, the value increases due to the lower supply; pushing down the interest rate (Federal Funds Rate, above). This lower interest rate encourages more borrowing because it's less expensive.
Debt in itself is a good thing. It builds modern economies. We run into trouble though when debt growth continues to outpace income growth over the long term as illustrated in the US Debt to GDP ratio approaching 110%. Easy debt tends to carry with it a momentum; the more debt you have, the more debt you don't mind having.
Warren Buffet said, "Nothing sedates rationality like large doses of effortless money.” The easier access to debt, the more effortless the money. When people don't have to work as hard for the money, they tend to give it a little less value and use it more frivolously. Buying a bass boat rather than investing in stocks or crypto; corporate stock buybacks instead of research & development; funding bloated entitlement or military programs rather than repairing infrastructure; this trend of diminishing returns on debt is growing louder by the decade.
This easy money of near-zero interest debt contributes to wealth inequality by encouraging spending for the short-term at the expense of savings and investment for the long-term. This has disproportionately affected Americans below the top 10%. "The top 10 percent of Americans owned an average of $969,000 in stocks. The next 40 percent owned $132,000 on average. For the bottom half of families, it was just under $54,000" - source. This is not a sustainable economic model for a robust middle class and a stable society.
Limiting the Fed from making debt so easily accessible might be a good first step in ameliorating this issue. Less easy debt may encourage individuals, corporations, and governments to channel money to more long term productive initiatives, promoting net capital formation and growth. And creating a future that we can all enjoy.
Have other nations experienced similar issues? Do you agree or disagree? Anything to add? Thanks for reading.
Credit for Photos:
https://pixabay.com/photos/dollar-flying-concept-business-2891817/
https://www.widewalls.ch/magazine/future-cities-green-architecture-environment
https://www.businessinsider.com/americas-crumbling-infrastructure-bridging-the-gap-2014-6
References:
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
https://fred.stlouisfed.org/series/GFDEGDQ188S
https://fred.stlouisfed.org/series/FEDFUNDS
Despite what people think, the United States continues to prosper.
I agree, the US continues to prosper, especially when you benchmark prosperity of the median person 100 years ago, or even 50 years ago. But the past half century has been concerning though. There has been a de-emphasis on long term capital accumulation and growth, such as innovation, infrastructure and savings/investment. This is at all levels, public and private sector; and households. Obviously there is still growth in all of those categories, but relative per capita participation has been waning for the past 50 years. And the marginal efficiency of capital (MEC) has been declining as well during this time. I really like your comment, I forgot to bring up MEC in the post. Thank you.
Happy that you enjoy my comment. :)
Congratulations @fijimermaid! You have completed the following achievement on the Hive blockchain and have been rewarded with new badge(s) :
You can view your badges on your board And compare to others on the Ranking
If you no longer want to receive notifications, reply to this comment with the word
STOPDo not miss the last post from @hivebuzz:
Hello @fijimermaid
Thank you for posting within our hive.
Please spare few minutes and read how project.hope is organized and learn about our economy.
That would help you understand more our goals and how are we trying to achieve them. Hopefully you will join our community and become strong part of it :)
Do you use telegram or discord? If you do then join our server and give me a shout. I would gladly share with you goals of our community and introduce to others from our team.
Our discord server: https://discord.gg/uWMJTaW
Yours,
@project.hope team,
Dear @fijimermaid
Welcome to PH (project.hope) community :)
Hope to hear more from you in the future. Also consider cross-posting this topic on Steemit (most of our community members are engaging there).
ps. check out comment from project.hope and cyu on our discord.
Cheers, Piotr (ph founder)
Thank you @crypto.piotr.
Hope to see you on our Discord @fijimermaid :)
ps. did you ever consider setting up some profile picture? Right now your account does look like bot / it belongs to someone who is new on the platform.
Cheers, Piotr
I put a UFO picture up. I'm thinking about a real picture, but I'm a little shy, haha. 😁
no need to be shy @fijimermaid :P
Hello @fijimermaid
Welcome to the PH community.
I think it is a complex issue that raises, I am not very wet in this matter, but I know that there are debts that limit a lot, as well as there are others that allow to create better things.
However, the differences in social classes are increasing, unfortunately. The classic phrase: "The rich get richer and the poor get poorer.
Thank you @josevas217.
Great quote, "The rich get richer and the poor get poorer." As a species, our global civilization needs to address this problem sooner rather than later. Artificial Intelligence and robotics might accelerate this "social classes" gap as well. I am an optimist, so I know humans have the capacity to address this, I just hope we have the will.