Current government policy and bank lending practices continue to subvert U.S. economic growth.
Excessive government spending, debt accumulation and debt rollover permit banks to borrow from the Federal Reserve at very low interest rates and lend it back to the U.S. government, generating a decent low-risk profit spread.
In fiscal 2012, the U.S. Treasury issued $1.089 trillion in new debt, the Treasury Department reported, and rolled over $2.783 trillion, according to Bloomberg. With a Federal Reserve discount rate of 0.5 percent and a 30-year U.S. Treasury interest rate of 3.125 percent, the banks are able to generate a virtually risk-free return of 2.625 percent, thereby lowering their incentive to lend to the private sector.
Further, banks are guaranteed a rate of return by the Federal Reserve of approximately ¼ of 1 percent on all excess reserves. This policy also reduces the incentive for banks to provide private consumer and business loans. These practices will continue for some time, since the Fed has claimed it plans to keep these low interest rates for the foreseeable future.
Accordingly, this excess risk aversion provides less funding to innovative, entrepreneurial activities, which have a much greater economic multiplier than public sector spending and investment do. This lowers the quantity of high-quality, cost-effective goods and services being exchanged, which translates to reduced transactions per unit of currency or slower monetary velocity.
A lower monetary velocity generates less income and tax revenue growth and increases the annual deficit, total outstanding debt and debt service expenditures.
Essentially, the government creates money to fund its excess spending and debt and buttress the banks, while creating a stagnant economic environment for the masses.
Ironically, an increase in interest rates may provide more incentive to lend to qualified private entities, since the spread versus U.S. Treasurys will fall. Moreover, the demand for loans may rise, since the expectation may be that future rates will also rise.
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