The end of free money?

 
US Federal Reserve exterior The US Federal Reserve has announced a slowdown in its effort to boost the US economy

Is the beginning of the end of this unique era of almost free money good or bad for us?

It is hardly the end of the era of cheap money.

The US central bank will still be buying US government debt and mortgage bonds at a rate of $75bn a month, down from $85bn.

And the US Federal Reserve also made clear it expects its policy interest rate, the Fed Funds Rate, to be as close to zero as makes very little difference for many months and probably years.

But, barring major bumps in the road, the Fed is embarking on a very slow journey towards a world in which risk is priced according to the normal rules, in which interest rates are at more conventional levels.

And of course, if that journey of money becoming pricier is begun in the world's largest economy, America, the rest of the world will be pulled along, perhaps not always happily, but inevitably.

Indeed, although the Bank of England does not want to increase its policy rate any time soon, and has no intention at this juncture of sucking any of the £375bn of new money it has created back from the British economy, market-based interest rates have been rising for much of the year - as investors have bet on eventual normalisation of monetary conditions.

Although this will scare heavily indebted households and businesses - and will even cause some anxiety among governments like America's and the UK's with their huge debt burdens and substantial continuing borrowing needs - the start of the journey is a benign augury.

That is because it reflects a growing confidence, among central banks and investors, that the long years of economic stagnation since the great crash and recession of 2008 are finally ending.

The recovery is manifest in the most positive way in both Britain and the US, in falling unemployment - and as it happens, today's British employment stats were the best in years.

But our economies and financial markets have been hooked on the drug of cheap money for longer than at any time in history.

And we simply don't know whether cold turkey will be simply uncomfortable or accompanied by periodic seizures.

What we do know is that dependence on free money forever would eventually undermine confidence in our ability and willingness to honour our debts, in the credibility of our respective currencies.

Or to put it another way, the expansion of bank balance sheets, the pace of money creation, could not continue at breakneck speed sine die.

And if it isn't to slowdown now, with some momentum at last behind economic growth, when exactly would it end?

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 155.

    @ 149 Babycat and 153 Fidius Albion

    You may be familiar with the JFK Executive Order 11110, signed by the President on June 4th 1963.

    http://www.john-f-kennedy.net/executiveorder11110.htm

    (Just one of many explanations as to why the Fed's power remains untouchable to this day)

  • rate this
    0

    Comment number 154.

    @145 prudeboy
    The people who run & work in financial services are unlikely to do so if business were losing money or they were paid less than min wage. ;-)They have a cornered market where some skills are rare & command high salaries because they produce high returns. They produce, all round, & some of them do very well out of it.

  • rate this
    0

    Comment number 153.

    149.Babycat

    "Why does the Treasury not just cut out the Fed and issue directly?"

    A very good question!

    Also:

    Why does UKgov maintain the 'fiction' of borrowing from and paying interest to its wholly owned 'subsidiary', the Bank of England?

  • rate this
    0

    Comment number 152.

    145prudeboy
    Money creation is not same as wealth creation. If diamonds were found in Antartica & were available then what would happen to their "worth"? Ditto gold
    ~
    Wealth is not necessarily worth. 'Money' merely denotes creation or accumulation of wealth although it is easier to hold £in the bank or pocket than oil or electricity, easier to use at shops than diamonds

  • rate this
    0

    Comment number 151.

    145.prudeboy
    #140. Up2snuff
    Stop uttering your beliefs as facts.
    ~
    Ha ha. Very funny, a good dig at another poster. ;-)

  • rate this
    0

    Comment number 150.

    Nothing changes.
    People with very little money would like more money.
    People with lots of money want more and more money.
    Some people think it is all about Economics.Some people think it is all abut Greed.
    And too many people care about people with money, than the people who have no money.
    We really are a screwed up Country.

  • rate this
    0

    Comment number 149.

    @95.Fidius Albion
    "Strictly, the Treasury organises the printing of $ bills and provides them to the Fed at the cost of production. The bills become 'money' when the Fed issues them."

    Why does the Treasury not just cut out the Fed and issue directly? The 1913 Federal Reserve Act can (and ought to) be repealed.

    http://www.youtube.com/watch?v=HfpO-WBz_mw

  • rate this
    0

    Comment number 148.

    What about the rate of the reduction as a percentage, are these calculations right and will they have an impact.
    Month 1 reduce by 12.00%
    Month 2 reduce by 13.00%
    Month 3 reduce by 15.00%
    Month 4 reduce by 18.00%
    Month 5 reduce by 22.00%
    Month 6 reduce by 25.00% (More than twice that of month 1)
    Month 7 reduce by 40.00% !
    Month 8 reduce by 66.00%
    Month 9 reduce by 200.00%

  • rate this
    0

    Comment number 147.

    98.Dr Bob Matthews

    "Printing paper does not in any way, shape or form create real wealth"

    I absolutely agree. @95, I was merely trying to dispel some of the myths about US (&UK) gov debt and highlight the stupidity and dishonesty of the methods by which money is put into the economy.

    I also totally agree with you on the role of manufacturing.

  • rate this
    0

    Comment number 146.

    From what most commentators say any rise in interest rates would cause financial chaos, even a small rise from 0.5%. Do they expect interest rates to stay low forever to avert calamity ?

  • rate this
    +1

    Comment number 145.

    #140. Up2snuff

    Stop uttering your beliefs as facts.

    Money creation is not the same as wealth creation.
    If all of a sudden diamonds a plenty were found in Antartica and they were available then what would happen to their "worth"?
    Ditto gold.

    Energy, oil however, does have intrinsic value.
    Energy is everything.

  • rate this
    0

    Comment number 144.

    I have a rather different take on this tapering: $10bn less a month means just that, $75bn in Jan, $65bn in Feb, $55bn in Mar, etc. How else is it all to be gone by the end of 2014? I can't see it being $75bn a month far into next year. Maybe the markets haven't woken up to this yet.

  • rate this
    0

    Comment number 143.

    Well let's wait and see what happens when the hyper inflated bond market does what all over inflated markets do. We'll see how much control central banks or at least the BoE have then over interest rates. The trigger - maybe the London property market going bang. Or maybe the bond market doesn't need a trigger.

  • rate this
    +1

    Comment number 142.

    69. funky worm

    They are related. House prices are bid up, they have no reason to cost so much. Remove money via proper rates from those bidding the prices up, and house prices have to fall. There is only so much money to be spent. Everyone at all time stretches as far as they can to out bid others for the house. What does not go in interest goes on the prices, forcing up the amount borrowed.

  • rate this
    +1

    Comment number 141.

    Looking at the lovely photograph of the Fed at the head of the article, I see that bond villain BB has not only distorted the economic rules of capitalism with his obsessive QE, he has also warped the fabric of space-time.
    Where are you 003, the world needs you to straighten out those gateposts..
    (001 enjoyed too many dry martinis, and I now suspect 002 was a double agent working for the banks)

  • rate this
    +1

    Comment number 140.

    109Dr BobM
    Wealth is created by "real work" and manufacturing not by incessant gambling on futures
    ~
    By 'gambling on futures' I assume you mean financial sector. Fact is that it does generate wealth & prosperity - and for associated professions - otherwise no-one would do it.

  • rate this
    0

    Comment number 139.

    86. Dr Bob Matthews
    I have late 2015 pencilled in as the beginning of the next crash too. Trouble is, interest rates will probably still be as low as they are today. Interest rates are always reduced during a downturn, which means they will probably go negative this time. Maybe this is when hyperinflation, that so many have predicted, begins to kick in, preceded by a period of deflation.

  • rate this
    -1

    Comment number 138.

    Alexander Ehmann, of the IOD, said: "This consultation underlines how important a varied and flexible labour market is to our economy, and quite how out of touch those arguing for an indiscriminate ban on this casual form of work were."
    Now who is out of touch, Vince Cable? Yes, the IOD definitely, this government totally. They are all in it together, graft & fraud on an industrial scale!

  • rate this
    +2

    Comment number 137.

    133.All for All
    "Your comments much appreciated, but we do I think have to defend 'the real world'"

    Can't fault you there. Let's just agree that things could be better managed with more 'real world' benefit to the whole

  • rate this
    +4

    Comment number 136.

    Anyone can say "the economy is healing" if they are buying more bad debt at 85bn dollars a month with money created out of thin air. As the Noel Coward quote from the Italian Job says "Camp Freddy, everyone in the world is bent". The thing is the media report this as the truth and most people believe it. Power, Corruption and Lies.

 

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