
With many companies and financial institutions holding on to $Trillions of dollars in cash reserves, how can you get them to lend and spend? Simple. Make it costly for them to do so by debasing that value of those dollars forcing institutions to put that money to work in the economy. Sounds logical right? If the Federal Reserve goes through with its plan for quantitative easing round 2 (creating money out of thin air) then those huge cash reserves will buy a lot less. This intervention is necessary but sinister at the same time and may be fraught with unintended consequences. There has to be some kind of catalyse that forces companies and institutions to invest and spend because to put it bluntly consumers simply aren’t doing so right now and they can’t. I have personal experience with this myself. I am a little over-leveraged right now and in the process of saving and investing. Why?  Because that’s what you do when you spend more than you make (cough, cough, Washington). The term is called delerverging or debt reduction. There numerous reason why businesses aren’t spending, banks aren’t lending and normal folks aren’t shopping. Fear of the future. Regulations from TARP, Financial regulatory reform, Health care legislation costs, Mal-investment from the $800 billion dollars stimulus and the prospect of higher taxes next year have paralyzed the capitalist system. Not to mention the fact that they (the private sector) themselves have some deleveraging to do.  No amount of money being pumped into the system is going to make anyone part with their money as long as these uncertainties exist. And even if it does that money won’t be invested in the U.S.  Not until these uncertainties resolve themselves will money be parted with.  That may continue to force the Fed to print even more thus further devaluing the dollars these companies hold in reserve. It’s a dangerous game of chicken that may end in hyper-inflation. Who will blink first?  The Fed can only print so much before they reach their inflation target of above 2%. The private sector can only hold on to their reserves for so long before the devalued dollars they hold are worth less and hence lack the purchasing power necessary to do anything constructive with. It’s a good old fashion face-off with the future value of money at stake.