What’s Up With Inflation and How Can Rates Stay So Low?

The Bank of Canada left the prime lending rate alone today and indicated it has no reason to raise rates in the near future. Good news for borrowers and bad news for depositors. As I write this, CNN is reporting the Dow is up based on optimism on the European debt crisis. Optimism?!

These two news stories are connected. Borrowing costs are based largely on supply and demand. It seems like every country on the planet is borrowing more money. Lots more money! Where is it coming from?

There was a TV interview with the Chairman of the US Federal Reserve, where the Chairman was asked how they actually lend $1,000,000,000 (one billion dollars) to a company like GM. “Like, is it a big cheque like you see winners receiving at golf tournaments? Or do you just transfer the money into their chequing account? What’s your daily limit?”

Upon reflection, the Chairman replied they just deposit the money into the account. “So you’re just printing money?” asked the interviewer.

“No, we have the money” replied the Chairman. Now he began to appear just slightly nervous.

“Really. Where do you keep it?” asked the interviewer.

“Well…it’s on a spread sheet.”stammered the Chairman.

One year later, the same interviewer put the exact same question to the same Chairman. Having a year to think about it, he confidently replied that the proper term for this type of money creation was “Quantitative Easing“.

Here is the Wikipedia definition:
Quantitative easing (QE) is an unconventional^[1][2] monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy.

“So you’re just printing money” stated the interviewer. “Well, we don’t actually print it any more.” was the reply.

Therein lies the answer to why rates are so low. If there was a finite amount of money on the planet then rates would now be through the roof! Supply and demand, right? But all governments (well most) just keep printing more. And more, and more…including Europe. It’s just how they hide it, that’s all. That’s why the Dow was excited about the European situation with their debt crisis and was up today. I guess they like the way they’re trying to hide it!

The U.S. ran up a previous record $400,000,000 (4 hundred billion) dollar annual deficit under George Bush. Under Obama, the deficit has climbed to well over $1,000,000,000 (1 trillion) dollars per year! Where is the money coming from?

Normally, if you print so much more money your currency drops. But everyone is doing it! So it’s all staying relatively even. For now. When the penny drops watch for higher rates and higher inflation. But for now, so long as nobody appears to care, rates will stay low, in North America in any case. When the penny does drop….undiscovered country…

---