There are a significant number of naysayers on YouTube warning of impending gloom and doom as the U.S. central bank, the Federal Reserve System, attempts to rein in inflation. The classic method for combating inflation is for the Federal Reserve System to discourage spending by encouraging commercial banks to keep more money on reserve in their own vaults or on deposit with one of the twelve district federal reserve banks.
The Federal Reserve System’s incentive takes the form of increasing the amount of interest it pays on the reserves I mentioned before. By raising these rates, referred to as interest on bank reserves, the Federal Reserve System hopes to influence the interest rate that banks charge each other when they lend each other, on an overnight basis, the very reserves they maintain with their district’s federal reserve bank.
So, that means getting paid 3.15% by the Federal Reserve System and picking up an extra 3.08% if those reserves are loaned to another commercial bank. With this money kept out of circulation and in bank vaults, the money remaining in the financial system becomes scarce and interest rates are increased in order to reflect this scarcity. Less borrowing and less spending should lead to lower prices, a slow-down in economic activity, and a reversal of inflation.
Again, that is the theory. A number of commentators believe that what I just described above is short-term; that even as interest rates increase, in the longer-term business activity will pick up. They base this on the Federal Reserve System’s management of the money supply under chairman Paul Volcker during the late 1970s and early to mid 1980s. As a student, I was shielded from the brunt of slowdown in the early 1980s resulting from increased interest rates.
But I admit the 1980s were a great decade for we Yuppies and Buppies due in large part to the ease of finding work. I was always employed, at times finding a job withing a couple days of leaving an old one. But that was forty years ago. Skill sets and needs, digital technology, balkanization of tasks, and a focus on data accumulation and analysis have created a new topography that leaves older workers and the unskilled behind.
For this reason, I wonder about workers like myself, pushing sixty, seeing their savings and prices of their assets eroding as a result of an increasing money supply driven by historically low interest rates. How will these taxpayer-electorates respond politically where they see government failing to provide a platform that provides them with opportunity?
Just as importantly is how will this and future administrations manage this change in the political economy where the taxpayer-electorate, particularly its older and less skilled members, have no access to enough capital to sustain them in a shifting economy?
Also, you may be among the fortunate number that can currently sustain itself during this shift. Depending on which rung you sit on today, are you prepared to be the new bottom rung? It is all relative.
2 October 2022
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