ARE THE DAYS OF EASY MONEY DISAPPEARING? :PAYDAY LV
When the Covid-19 pandemic threw the economies of the world one big curveball, the major economies knew something needed to be done to keep economies moving and they had to act quickly. Average people need to be able to borrow money for various things, but the major issue centered around businesses that require loans on a daily basis just to get through daily operations.
Let’s discuss easy money, whether policies will change anytime soon, and how you can benefit from access to money before it goes away.
Make Money Easier to Borrow
WHAT IS “EASY MONEY?”
Some people use the phrase “easy money,” but economics professors would call it “loose monetary policy.” It means that, in the case of the US economy, the US Federal Reserve or “Fed” has made it easier and cheaper for institutional banks to borrow money.
When institutional banks pay a lower interest rate, this generally trickles down into almost every corner of the economy. Other people and businesses are charged less money on loans, and there is more motivation to borrow money.
“Easy money” is generally a sign that the Fed wants to help the economy expand or keep it from slowing down too fast.
HOW DOES THE CENTRAL BANK MAKE MONEY EASIER TO BORROW?
When the Covid-19 pandemic hit, the Fed knew the economy was about to have major issues. It acted swiftly and decisively by lowering the Federal Funds Rate – the interest rate institutional banks pay to borrow money from the Fed – to nearly zero.
The Fed also decreased the reserve ratio. This is the amount of money that banks are required to keep in reserve as a safety buffer in case an above average number of people or businesses require large cash withdrawals.
When the reserve ratio is lowered, banks don’t need to keep as much cash on reserve and it can be loaned out. By reducing the reserve ratio, it further loosens the monetary policy and makes it easier for individuals and businesses to borrow money and spend it where needed.
WHY WOULD THEY MAKE IT MORE DIFFICULT TO BORROW?
The job of each country’s central bank is to monitor the economy of their respective country and make changes to make sure growth is stable. This means not only making changes to loosen monetary policy but also making changes to make sure the economy isn’t growing too fast.
A good indicator that an economy is growing is steady inflation. Inflation is when the purchasing power of a currency falls over time. In other words, prices of goods rise as a result of inflation. A house worth $50,000 in 1980 now costs $250,000 in 2021 because of inflation.
Sometimes, economies can experience too much inflation, which means prices of goods rise too fast. This can be caused by easy money policies that last too long. When money is easy to borrow, consumers and businesses buy more stuff. When demand rises, companies tend to increase their prices based on the availability of raw materials, production costs, etc.
If prices are rising too fast, the Fed may step in and actually increase the Federal Funds Rate, the Reserve Ratio, or both to intentionally keep the economy from growing too fast.
If an economy grows too fast, you can have huge parts of the country unable to keep up, and you could potentially have far greater inequality problems that can’t be easily fixed.
WILL THAT COME ANYTIME SOON?
The latest reports from the Fed are that they plan to look at increasing the Federal Funds Rate starting in late 2023. That’s assuming nothing happens to change their stance before then.
WAYS TO BENEFIT FROM EASY MONEY
For individuals, anything you need to borrow money for will become more expensive once the Fed starts increasing rates. Whether you borrow money for college, a car, or a house, all of those things will start to be impacted.
If you need to buy a car or a house, it may be best to do so within the next two years. For college loans, there’s not much you can do about timing those, but just be prepared for interest rates to be slightly higher on those.
Easy money is generally a bit scary at first because it comes on at times when the economy has experienced a downturn. However, once the dust settles, easy money can be a great tool if you have a need to borrow money. Be prepared for interest rates in increase in the next two years, though. This will more than likely make your borrowed money more expensive.