Where Will All the Money Go?

Hello, and welcome to another episode of the Minor Issues Podcast. I'm Mark Thornton at

the Mises Institute. Well, the Federal Reserve seems to have finally committed to, but has

not yet begun, its rate-cutting cycle of lower interest rates, specifically the federal funds

rate or policy rate. This lines up well with what I've been thinking and saying here and

elsewhere. The Fed was not likely to cut rates until the fall of 2024 or later. My

thinking or guessing was based on the notion that the Fed wanted to remain perceived as

tough as possible on inflation for as long as possible, and that they wanted to be perceived

eventually as coming to the economy's rescue rather than just goosing the stock market

higher.

The Fed plays a confidence game with the general public.

More importantly, in my thinking, the rate cuts would line up well with and reinforce the

un-inversion of the interest rate yield curve. Now, with the Fed's chairman, Jay Powell,

fully making intentions known at the Jackson Hole, Wyoming Fed Conference and market expectations

and a short-term adjustment, the inverted yield curve is poised to pop. You can see in the graph

linked in the notes, it seems inevitable that short-term rates, two-year government bonds,

will fall below long-term rates, 10-year government bonds. You can also see that this

inverted yield curve cycle is the most severe and long-lasting inversion.

since the late 1970s. As I remember it, that previous cycle was one of relative impoverishment

for Americans, economic distress, unemployment and inflation, and even more to come. The term

stagflation was only coined in the 1960s in the United Kingdom, and it was one of the worst

decades in stock market history in inflation-adjusted terms. Of course, every cycle has

its differences, and of course, you cannot measure the male adjustment or erosion of the economy's

capital structure that the Fed has caused with its inflationary policies. In addition to thinking

that the Fed would only begin cuts this fall or even winter, depending on the election and

severity of the downturn in the data, I also suspected that the Fed would engage not in

just one or two quarter-point cuts in rates that it is currently talking about and that markets

are expecting, but in a series of fairly rapid cuts, maybe 10 or 20 quarter-point cuts.

This was based on guesses for a worsening employment situation and a

further increase in unemployment.

In the fall, in stock market leadership and stock markets more generally, and also real estate

markets, whether they are in a bubble, such as new home construction, or just teetering, such as

commercial real estate. My question today is what comes after all this happens, supposing that it

does happen. If the Fed does cut its policy rate several times, that will impact people's decisions.

All the money that's going to be spent on the Fed is going to be spent on the Fed.

All the money in various bankable deposits might be considered for redeployment. There has been a

huge increase in the various types of demand deposits in the 2020s, and this spiked upward

higher when the Fed raised rates, forcing banks to follow. Banks themselves have tons of excess

reserves on deposit with the Fed, earning over 5%.

If the Fed,

lowers rates, what will happen to all that money? Well, here are some of the alternatives.

Part will stay right where it is in various forms of cash and demand deposits.

Part might be invested in stocks and longer-term bond investments, but which ones? Part might be

used to pay off or pay down debts at higher interest rates, such as credit card debt,

mortgages, personal loans, etc., and business

purchases. Part could be spent or consumed, or even invested in new businesses. Part could be

converted into alternative or now-defunct forms of money, such as Bitcoin or the metal silver,

which previously and widely served as money. Part could be sent overseas to stock markets,

bond markets, or foreign currency deposits. This type of flow would be influenced by,

for example, foreign exchange rates, where the dollar has been falling lately.

These decisions will depend on expectations built on past experience and current conditions. For

example, if you made a $1,000 profit on Nvidia stock or Bitcoin and they are currently heading

higher, you might just deploy more cash into those investments. Banks also have a menu of choices,

should the Fed reduce their interest rate.

For example, they may grant more loans or mortgages if they are optimistic, or they may

increase their loan loss reserve if they are pessimistic. Once this process is initiated by

the Fed, it should happen rather dramatically in statistical terms, say over two years.

It's really hard to guess where the money will go, so let us drop back and see what the Austrian

business cycle theory might tell us. It says that in the upturned part of the business cycle

that we have been in for a long time, resources will be invested in longer-term capital in more

roundabout production processes to the neglect of existing structures of production that produce

closer to the production of consumer goods. The longer-term orientation of the capital stock

includes

real estate creation, which typically lasts more than 25 years, technology, especially new and

advanced technologies that might not even be deployed under free market conditions for years

to come, if at all, and anything research-related, such as pharmaceutical products that often don't

pay off for years or decades to come. The theory predicts that such investments now are overdone,

and also,

they are premature and will probably suffer the most losses in downturn.

The shorter-term capital stock is an investment that produces consumption goods or direct inputs

into consumption goods. For example, if I make a $1 million investment to clear some land and have

it tilled up and plant a crop such as corn, I will have a product to sell in less than a year's time.

This is a rather direct and it starts to pay in a relatively short term, even though the process may last for decades,

such as producing corn chips. In contrast, I could have made the same amount of investment,

but planted grape vines for the production of wine. But I might not be able to actually produce

wine for sale for a decade or more, which is similar to pharmaceutical research. That is,

more roundabout. This would suggest that the historically low interest rate policy environment

that we have been living in since the Great Financial Crisis, in the aftermath of the Fed's

housing bubble, has tilted the capital structure of our economy in favor of the longer-term,

more roundabout production and away from more direct and lower-order consumer goods.

Prof. David Chambers In terms of my guesses,

I think our relationship to the high-enddawn price creates a good advertiserspace.

agile AI will, no doubt, eventually bring many benefits, but it may prove to be a bad

investment in the short run. The underinvestment area of the economy, is

그다음에 in production of commodities that were illustrated that I illustrated,

veda

This malinvestment pattern has probably been exacerbated by other government policies, which have increased longer-term, more roundabout production, such as COVID treatment spending, the CHIPS Act, and green global warming climate change policies, which have discouraged, for example, agriculture, ranching, mining, and energy.

Thank you for watching.