Starting with bank loans, which, by virtue of being the actual money supply, are of much greater importance than they are currently perceived to be.

What measures can be taken to increase the total amount of loans, and hence money supply, in the economy? 

Attempting to answer this question will quite naturally take us to the banks, since they are the ones making loans and actually creating money in the financial system. Which means we will need to understand how things stand from the perspective of the banks. Rephrasing the question accordingly:

Given that interest rates are at historic lows, who are banks lending to, who are they not lending to, and why?

Interest rates are an important part of the question, as well as an important clue, since conventional wisdom (and mainstream belief) dictates that QE, abundant bank reserves, and low interest rates should lead to an explosion in loan growth.

Unfortunately, equating low rates with the easy availability of money is a fallacy; in reality, the opposite is true. 

A direct consequence of policies like QE not working as intended and creating economic opportunity is that economic activity still isn’t robust enough for interest rates to rise in a strong and sustainable manner.

This gives rise to what we see today, a situation where banks lend only to their most creditworthy clients. Which naturally means that banks are not lending to anyone they deem to not be creditworthy enough.

This has in turn created a situation where some people can access bank lending, and others cannot.

In other words, bifurcated access to capital, and two different economic realities for two different subsets of the population.

Which takes us to the labor participation rate, which has fallen for the past 13 years or so, ever since the Great Financial Crisis of ‘08, and is still falling.

The Fed’s policies, by being focused on bank reserves, have not created economic opportunity for these folks over the last 13 years. If they did then the labor force participation rate would not have fallen in the way that it has.

This is a worrying trend which indicates deep seated problems in the labor market that have gone unsolved for more than a decade. Which also means there is a large, and growing, portion of the population that has gotten discouraged and simply stopped looking to get back into the workforce.

In other words, permanent damage, from all the way back in 2008, then compounded by the Covid pandemic in 2020.

That’s more than a decade where an increasing number of Americans did not, and could not get an income.

That’s what really matters, and is the crux of our entire discussion; because, from a bank’s perspective, no income = no loan.

To be continued…