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Money and Markets: Governments spend money to keep interest rates low

After the financial crisis of 2007-08, governments realized that they could make high interest rates disappear in an instant through quantitative easing. Now with massive Covid-19 debts, this tool will become even more valuable.

The last week of February 2021 marked the first time since the start of the Covid-19 crisis that global interest rates took a run-up. The world’s stock markets shook. The interest on debt is a big deal, because very few listed engineering companies wouldn’t go bankrupt if they couldn’t renew their loans.

There is a powerful liquidity system that pumps money from one part of the economic body to another to make it function, and interest rates are at the heart of that process.

In 2007-2008, that system got a seizure because much of the system had turned to pumping money into real estate using financial instruments that didn’t work properly and consequently froze the whole system. Without an address, it would have devastated the world economy for decades.

Fortunately, the world’s governments have synchronized to defibrillate the system and spent the next decade cleaning it up. As bad as that outcome was, the situation would have been dramatically worse had it not been for investment in what was then called “unorthodox monetary policy.

” What governments learned was that “unorthodox monetary policy” not only worked but was also a fantastic new method to mitigate any downturn. It became the new orthodoxy.It turns out that interest rates can be thrown away with a stroke of the pen and that debt is, in fact, wealth, not a milestone to crush and shame the borrower.

Let’s hope so, because debt is mushrooming to unprecedented levels and at the center of it all, interest rates must remain incredibly and historically low.

To keep them down, there have to be lenders, and those lenders have to have money to lend. Under the new rules, the government lends the money to itself and others for nothing, while the others are responsible for spreading their loan at a higher rate to those at the lower levels of finance and society.

You could picture it like this: the government prints money and gives it to banks almost for free, asking you very little to borrow the money to buy a house at ever-increasing prices, so the seller gets a little more or more. can spend.

the buyer also borrows something on top. Asset prices are on the rise and that becomes a kind of ATM. The government prints this money by swapping its high-rated bonds for lower-rated bonds, so there’s not an instant flow of cash, just a flow of new assets that can go on a screen later in others and then in numbers.

be exchanged. the economy has more money. This is where the idea of ​​”liquidity” comes from.So, for example, my £ 100 Clem bond is worth £ 0 because no one will buy it, but the moment the Bank of England gives me £ 90 in government bonds for it, I’m in business.

I can sell that government bond for £ 90 and start playing. Maybe the government will even buy back that same bond a little later from whoever bought it for freshly printed pound bills, so the money supply goes up and everyone is happy. So what can go wrong? It would be difficult if central banks became not only the buyer of last resort, but also the only buyer in the market at all.

If other parties no longer want to deposit their money for “zero point very little percent” interest, then bond market interest rates will rise unless the central bank takes over.

It is not rising interest rates that count as much as the reduction in the flow of money that is causing the problem. The more money, the lower the rates, so a bond buyer’s strike means that there simply isn’t the money in the system to borrow, and that’s when all those companies run into cash flow troubles and go bankrupt.

That would be bad.Today, many a Covid-poleaxed company have access to generous funding because the world’s central banks have made so much money available that it is worth putting money into risky situations.

These massive liquidity movements continue to keep whole parts of the economy from ceasing to exist. So when the last week of February 2021 suddenly sees the start of a bond buyers’ strike, panic quickly spreads in the stock market.

The good news is this. The government cannot afford to increase interest rates, and therefore money printing cannot and will not stop. Even when serious inflation does hit, they won’t stop because they can’t.

The loss of GDP from this crisis means that the only way for the state to maintain its expenditure is to close the gap between its budget and its income by printing money. It will take years to return to a deficit of 3-4 percent to GDP, and that goal cannot be achieved through austerity, even if it was politically possible.

As a result, there will be an endless stream of hot money into the economy and prices will rise – and maybe taxes too. That means instead of fearing interest rate hikes and austerity cuts, but the way to go is ‘pedal to the metal’, because we can shift this decimal point in the prices this decimal point to the right, and if you don’t get the liquidity that will leave you stranded on the muddy shores of this Amazon of money.