I haven’t really thought about it. If the Fed under Yellen keeps spending the way they do why would banks stop lending is what I’d ask myself.
If QE is stopped, then everything will contract. I think I’d encourage businesses to focus on their core business and operate it without borrowing. Go back to the same values they had when they were a young, vigorous start-up and couldn’t borrow.
Another possibility would be a world war and cut everything including social security, medicare, etc. as part of the war effort. (/sarc)
I havent really thought about it. If the Fed under Yellen keeps spending the way they do why would banks stop lending is what Id ask myself.
A liquidity crisis is caused when the demand for money is greater than the supply and people/banks hoard money and don’t spend/lend it. That’s what causes velocity to contract and growth to slow. The solution is more liquidity until there is excess liquidity and people/banks are willing to take risks with excess capital. The banks keeping the oney at 0.25% when they can lend and make a massive interest spread makes all the sense in the world. they just aren’t doing it. And businesses aren’t taking out loans because of the uncertain environment. “Operating without borrowing” makes the problem exponentially worse because there is no capital flow and velocity continues to collapse and the economy slows more.
Too many people think “QE” is bad without understanding how the monetary system works. “Printing money” is not, in and of itself, inflationary. It depends on demand and the last few years demand has been very high.