top of page
  • Mathieu Provencher

The Fed on a diet?

Do you guys know why the world is so worried about the Fed (central bank of the USA) reducing their printing of money? They are currently "printing" around 85'000'000'000 USD a MONTH (which is more than the total economy of Peru every two months and a half, around five times Peru per year)!!!!

The Fed started printing all this money (it's not really printing, as my previous students SHOULD remember) to help boost the then-depressed USA economy (we call this monetary policy). This extra money was mainly put there to give commercial banks enough liquidity to lend to economic agents of the USA... if they give loans, people are buying stuff, which should help the recovery.

However, a lot of that money went into less developed countries instead... which is somewhat good because it avoids inflation in the USA but somewhat bad because it didn't help much the American Economy (that, my friends, is the Provencher Liquidity Trap, Ta-Ta-Taaaaaa).

Now here comes the worries: The USA seems to finally be recovering, which means that the Fed can now pull out of the banking sectors and stop releasing all this free cash (they gave it very very low interest rates), which means in turn that these cheap loans will NOT be available to less-developed countries anymore, which means that these countries that relied heavily on American money will probably have economic slowdowns... do you guys see where this is going?

Investors pull out their money from these countries (fearing that their investments will not be very profitable anymore) and put it back in the USA, which decreases the currency value of the less-developed countries (these affected by the cash transfers) and increases the value of the USD. Additional problem: with all this easy cash available, a good amount of "beneficiary" countries (Brazil is one example) took loans to increase economic activity... that's not bad in itself except that they spent it in short-run projects with almost no long-lasting impacts.

Now that their currencies are decreasing in value, they have to repay a higher amount (in USD) and they won't have more economic activity to pay back with (because of their bad investments)... which is EXACTLY what you guys did in the great credit crashes that Latin America went through a few decades ago! Well done all !!!!

To answer the question "why are they stopping to print money": simple: because the economy is recovering and they can't release money forever (they don't print money anymore and their reserves are limited).

3 views0 comments

Recent Posts

See All
bottom of page