I have written countless articles on the poor operation of our government. We fail to address the pressing issues like our outdated and antiquated tax code, the fact that we operate without any form of a balanced budget, generate billions of dollars in waste, and we fail to address our mounting National Debt and the growing interest on this debt to name just a few. But recently it has come to light that our beloved Federal Reserve will now pay billions of dollars each year into our banking system for absolutely nothing! A situation that the Federal Reserve created.
From 2008 to 2015, the Fed purchased over $4 trillion dollars of bonds to stimulate growth in our economy. It did not work. In 2016, the Federal Reserve will pay at least $12.2 billion dollars to U.S. and foreign banks to keep the money created via its quantitative easing programs out of the economy. The goal of the policy called quantitative easing was to facilitate an expansion of private bank lending. If private banks increase lending, it would increase the money supply. However, one of the risks associated with quantitative easing is higher inflation. Looking back, the banks were reluctant to lend money.
To sterilize the vast sums of money that would otherwise circulate throughout the economy and cause inflation, the Fed pays an above market interest rate of 0.50% to the banks on the reserves that they created! Currently, banks are holding $2.5 trillion in reserves at the Fed and are paid $34.5 million dollars per day in interest. The Fed has indicated that it intends to raise rates in 2016 and it is expected that we could see two to four rate hikes next year. Assuming that the Fed does raise rates four times, payments to banks at the end of 2016 would amount to $103.6 million per day!
Never before has a central bank attempted to raise rates after having provided so much stimulus to an economy. Add to this the fact that the latest spending bill that Congress created to keep the government funded will increase our National Debt and the annual interest on this debt that is fast approaching half a trillion dollars annually. For the past eight years, it was relatively cheap for the government to borrow money as interest rates were low close to zero. Now, however, rates appear to be rising. The Bureau of Public Debt will have to pay more to borrow the same money it did in the past.
Economic chaos is not far away.