The Great Devaluation

4Hustle and Flow

Pretend for a moment that money had its own mind. Let's also pretend that money had its own goal, which is to find the very best place to flow in order to maximize its growth. When interest rates rise, money flows out of financial assets and into investments that pay fixed returns and physical tangible assets. Interest rates that rise indicate growth and encourage money to deleverage and pay down debts before costs become too great. When interest rates are lowered, the opposite occurs, and rather than flow into saving, money flows into borrowing as money takes advantage of the lower rates. This ebb and flow happens organically in a healthy environment. In a healthy economy this rise and fall of rates is organic and is called the business cycle.

In times of economic strife, central banks manipulate the price of money lower in an effort to stimulate. Lowering interest rates allows more money to be borrowed and the ability to refinance debts at lower costs. In the past, these manipulations by central banks have worked to generate enough liquidity to lubricate the system and get it functioning at a higher level. This only works when there is demand for more borrowing. In times of great uncertainty, even free money will be shunned.

Historically, when faced with an economic downturn, the Federal Reserve immediately lowers interest rates five hundred basis points. The financial collapse in 2008 was so big that the standard action of lowering rates by 5 percent wasn't ...