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How Is Quantitative Easing Going to Get People Borrowing?

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You can lead a horse to water, but you can't make it drink. The Fed can give money to banks to lend, but they can't make consumers or companies borrow it.

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Now, let's a take a look at the personal savings rate:



You'll see that right around the time when house prices peaked, the savings rate bottomed. Now, the savings rate has been in an upward trend for about seven years. We've made a break from the old patterns of consuming and borrowing, and as these have become more and more entrenched, you can see just what kind of headwind the Fed is facing if they want people to revert to old behaviors with respect to spending. This is what makes the Fed's latest decision so difficult to understand. They can leave monetary policy extremely accomodative. They can go out into the market and buy all sorts of assets, giving them liquidity that may not have existed without their purchases. But once they give that money over to the banks, it's all out of their hands. The Fed can give money to banks to lend, but they can't make people borrow money from banks. And as the chart shows, people don't want to borrow. Companies don't want to borrow, either.

As for inflation, it has been relatively subdued, mostly because all of that liquidity the Fed has created has not been getting used in the form of new borrowing. If people were actually increasing their borrowings to consume, we'd see inflation. And lots of it. But between people not wanting to borrow to buy houses or cars like they used to, and the negative social mood around banks that still persists, we may not see a big uptick in inflation anytime soon. Food and gas prices have never responded to monetary policy and they probably never will. That's one of the biggest reasons why the Fed looks at inflation excluding food and gas. But having said that, rising gas prices are a tax on consumers and when gas breaches $4/gallon, growth slows.
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