For years we heard about cheap money. This is another misleading idea promoted by many who really do not understand how things work.
It is true when interest rates are down, that qualifies as cheap money. However, there is a problem. It does not mean the money is accessible to the masses. For most, how expensive, or inexpensive it is, does not matter. If one cannot gain access to money, it is of no consequence what the interest rate is.
Since the Great Financial Crisis, this was the case. In fact, bank lending, which is really how the money supply is expanded, is flat. Since that time, we saw an abysmal rate of growth in the USD. Here is where people espousing how the "printing presses go brr" are completely ignorant.
Throughout these articles, we show how things truly operate along with where this comes from.
Can you venture a guess what growth rate in commercial bank lending was in the United States since the Great Financial Crisis? After all, we heard about the astronomical growth rate in the money supply. Certainly, since USD is created when banks lend, the number of loans have to be skyrocketing.
Well, not exactly.
The growth rate from 2008 was a pitiful 1.03%. That barely outpaces the US population growth over that same period, which averaged .76% per year. So much for money entering the economy due to the Fed's money printing. Once we understand how the USD is truly created, we can locate why there is a deficiency.
Since the USD is the global reserve currency, it has to feed the entire world. Yet since the growth rate barely outpaced the growth in population, let alone the economy, we can here how there is not only a problem domestically but also internationally.
By the way, the loans are all contained in the tables provided in the Z.1 report which is published each quarter by the Fed. Even their know data shows they are not in control the way they present to the public.
So why is the growth rate of loans so low if interest rates were near record levels (on the low side) for most of the last decade?
The simple answer is in the fact that low interest rates do not equate to lots of lending. Banks simply have not been issuing out loans like they did in the past.
One of the reasons for this is the decline in small business. Here is a vital distinction. USD creation is made by commercial, depository banks. The customers of these institutions are not the major corporations. Instead, we see small businesses making up the bulk of the commercial borrowing.
What happens when small businesses either do not want more or, worse, are not granted access? Exactly what we see.
This is a counterintuitive idea when we look at all the borrowing that took place. After all, weren't the 2010s the decade of the stock buyback? It seemed like each time we turned on CNBC, there was another announcement of a company borrowing money to buy back its stock.
Here is where the confusion can enter.
Large, public companies do not go through depository banks. Instead, they turn to Wall Street, i.e. the capital markets. They can issue out stock or bonds do get the capital required. For much of the last decade, bonds were sold into the market, which enabled hundreds of billions in stock to be bought back.
Obviously, these companies have access to the cheap money being offered. Since interest rates were low, and the hunt for yield was on, we see how many were willing to buy the bonds. So to them, cheap money was also accessible.
This is a much different picture that what small businesses saw. To them, cheap money did not equate to accessible.
It is a situation that should be no surprise. One of the biggest issues was the Dodd-Frank bill. To "punish" the banks, in an effort to make up for the Great Financial Crisis, lending got a great deal more expensive. Anytime compliance is entered into the equation, costs go up. Whether this was warranted or not is outside the scope of this article. What we cannot deny is the fact that lending became more costly.
Couple this with the fact the economy was barely attaining a 2% growth rate and we see how banks would be leery. There was no way they were going to lend with the economy was faltering. Outside of China, the growth since the GFC was lackluster.
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