When those banking insiders who are close to the money printing presses concoct schemes to print more US dollars, then they enrich themselves. This is due to an effect discovered 269 years ago, known as the Cantillon Effect. It makes the rich financiers more rich, but makes the regular citizen more poor.
How Investment Happens
A supply and demand exists for loanable funds. The prime mover of the supply of loanable funds is the saving-up from past success (economic good times, where money was put away). The prime mover of the demand for loanable funds is the outlook on future gain (high growth expectations, leading to big returns on investment).
The past determines the supply, the future determines the demand.
High supply, in the presence of low demand, can bring down the interest rate — but the high demand under robust economic growth will persistently “bid-up” interest rates, keeping them from dipping below a threshold level. Long-run (multi-decade) real growth in a free market is approximately 5% annual growth.
If population growth is 2%, then long-run “real per capita GDP growth” in a free market is 3%, and the people each own an average of 3% more things each year. This “per-person growth trend” was true in the USA from the Civil War up to 1929:
But the Federal Reserve Act of 1913, and especially FDR’s New Deal, permanently inserted central meddling with the broader economy — and interest rates were no longer allowed to serve as an unhampered signal of past success and future gain. People close to government and close to banking began tweaking rates, instead.
While this can dry-up savings, which could have the effect of increasing interest rates, the greater effect on interest rates after 1970 has been to hamper future growth, cutting the demand for loanable funds, leading to a low-interest rate environment of low growth. The low demand for loans, and low rates, signals a hampered market.
To get quick cash, even when no good future growth is expected, short-term interest rates can be driven down below the yield of the existing 10-year US bond — which tracks with future outlook. When that happens, short-term borrowing can be immediately converted over to long-term bond holding, obtain a “rate spread.”
The rate spread is real gain that you get regardless of the economics (it’s just math). If the federal funds rate is 0.5%, and the 10-year bond is 4%, then you would get a 3.5% guaranteed gain, like those close to the government did in 2010:
In essence, a bank could borrow a billion (1,000 million) dollars at 0.5% interest, and then immediately convert that borrowed money into 10-year US bonds, at 4% yield. This move puts approximately 35 million dollars into their pockets, risk-free. The next day, they could wake up and do it all over again, netting another 35 million, risk-free.
If the growth in the real economy cannot keep up with the 3.5% rate-spread that they take, then the equity in the real economy must be progressively sold-off to the bankers.
But notice what happens after these “rate-spread” carve-outs are made to those bankers and financiers. Because the rates weren’t “real” (were not actual signals of past success and future gain), an offset occurs:
In the past 8 recessions, this offset — caused by that initial “carve-out” to bankers and rich financiers — reliably predicted the recession within 6 quarters of dipping below 0 (where the federal funds rate creeped above the 10-year bond rate).
The Solution
Evidence suggests that “those close to money” have been putting the United States into recessions since 1970, by manipulating the printing presses so that they could acquire “unearned” gain in wealth. Instead of having a Great Reset where even more control is granted to the central meddlers — we should return to sound money.