The Maestro’s Monopoly Money

A few weeks ago I read that interest rates provide a signal for entrepreneurs. Huh, how can that be? Doesn’t the federal reserve set interest rates? I already understood that the Fed has been destroying the dollar’s value through inflation. But they also mess up business decisions of entrepreneurs? I spent a solid week trying to understand how that works. These two flowcharts are my best attempt to summarize the important details in a single page.

A Healthy Economy

Before discussing the Fed’s distorted economy, we should have a clear picture of a healthy economy. We know which variables move together: less consumption results in more savings, which lowers interest rates. This encourages more investment and eventually higher stock market valuations. But what are the underlying causes of each relationship? For example, exactly why do lower interest rates promote investment?  To understand it better, I started sketching very rough flowcharts. Then I tried to compile them all into one chart which tells the whole story.


Some features of this chart are very interesting. First, see the four distinct arrows flowing into “capital investment increases.” People are saving money. Their savings causes interest rates to drop. All this means is that the supply of free money has gone up, so the value of owning it (interest) has gone down. Entrepreneurs can take advantage of those lower interest rates to start new businesses. And since consumers are saving money, they will have more money to spend on those businesses in the future.

The most subtle part is that “quick buck” businesses with short, simple production processes suffer. Consumers have cut back on spending. And these simple business with little capital investment probably rely on a steady stream of income from frequent purchases of inexpensive products. Businesses with longer, “roundabout” capital structures may also suffer in the short term. But their slower, lower-frequency production process is more closely aligned with the new tendency of consumers to save money. They aren’t as bad off as the “quick buck” businesses. So more entrepreneurs start to develop the more efficient–yet more difficult and time-consuming to build–capital structures.

The result is that businesses become more efficient and profitable over time. The savings of consumers have given them all the necessary incentives to improve their business. And at some point in the future, when consumers start spending all that saved money, these extra-efficient businesses will be ready.

But who has time for that?

It’s such a long process, involving lots of hard work by many people:

  • Consumers can’t enjoy all their hard-earned money right now. They must resist instant gratification of all desires. It’s so hard!
  • Business owners and entrepreneurs can’t pay themselves a huge salary. They must work hard to design products, build complicated machinery, and hire workers all while trying to anticipate consumer’s future desires. They are delaying gratification too!
  • Investors must be content with slow, steady stock market profits. As some businesses slowly start to turn a profit, their stocks begin to rise. If the profit continues, the stock price continues to rise. No profit, no growth…then no return for the investor!

Maybe we can do better. Instead of relying on real savings (consumers are made to consume, after all) let’s just create savings out of thin air. Then we’ll use that new savings, i.e., new money, to grow the economy.

“The Economy” as defined by a five-year old

First, though, let’s be clear about what we mean by the economy. We want a simple definition, so let’s narrow our focus to just one year. After all, the average five year old can only think one year in advance, so that’s good enough. We’ll measure the economy with just one number, the gross domestic product (GDP). This is the sum total of every good and service produced in the country in one year. Granted, a great business which can employ hundreds or thousands of people takes decades to build. It takes decades for workers to become experts, decades to accumulate the necessary machinery, and decades to bring the best products to fruition. But again, who has time for that? Life is short so let’s just use GDP.

The Fed’s Franken-economy

Now that the definition is settled, let’s get back to growing the economy. Again, we don’t need people to save money if we can just print more of it. Let’s try to

  1. Print it out by the trillions to fund government programs. The government will spend money which will increase this year’s GDP.
  2. Make it very easy for anyone to get a big loan. Don’t worry about whether they have the ability to repay the loan, be generous. Those consumers will do what they do best and again the GDP will grow.
  3. When big businesses that employ lots of people fail, print money to help them get back on track. We can’t afford for people to be out of work, because they will stop buying things and GDP will shrink.


Sure, this plan has a few disadvantages. It destroys the ability of entrepreneurs and business owners to trust interest rates. They can’t tell whether short or long capital structures will be better. They can’t gauge what consumers want. They can’t even rely on the future savings of consumers. There is no savings, only debt, lots and lots of debt. Instead of building up efficient capital structures for long-term productive work, businesses are incentivized to get the money while it’s there, by appealing to the immediate needs of consumers. And when those businesses fail, more money has to be created to “tide them over.” The value of the dollar is destroyed by the printing of trillions. Stock market and housing bubbles arise and pop just as quickly, wiping out the life savings of millions of people.

But the great advantage outweighs all these. In this living-dead, franken-economy it is easy for everybody. No one need take risks. No one need delay gratification. Really there is no need to work at all, for all wealth can be summoned from the ether.

Genuine financial alchemy. The philosopher’s stone. Brilliant.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s