Won’t somebody please say something different about the Federal Reserve? Or nothing at all?
It seems amazing to me that we are so studiously focused on comments, statements, or actions emanating from the Fed. It is as if think we expect to find a morsel of truth that will give us special insight or a clue as to their next move.
I suppose that is reasonable to a certain extent – especially today. We are social-app (il)literate and very impatient. It seems to be a sort of day-trader mentality. The problem is that every morning we see the same headlines. All week long we hear about the most recent Fed meeting, or the release of minutes from the last meeting, or what to expect at the next meeting, etc., etc. And the cycle repeats itself every month. (I’m not Bill Murray and this is not Groundhog Day.)
We are addicted. We are all junkies.
Case in point, see the chart below:
Debt to GDP Ratio Historical Chart
(Chart of historical data comparing the level of gross domestic product -GDP – with Federal Debt. The current level of the debt to GDP ratio as of March 2018 is 105.68.)
What this means is that it takes $105.00 of debt to generate $100.00 of goods and services. A different way to think about this might be hiring someone at your company and paying them a salary of $100,000 per year. And then borrowing $105,000 to pay them.
Or maybe you are an investor in commercial real estate and your properties are worth one hundred million dollars. Which is fine, if you didn’t owe your bank one hundred five million dollars.
The current reserve ratio is set by the Federal Reserve at ten percent. This means that member banks can loan out nine dollars of every ten that they receive in deposits. The ten percent they are required to keep on hand is to satisfy your need to withdraw all of your cash reserves in order to pay for your daughter’s orthodontia. And, hopefully, everyone else won’t have similar needs at the same time.
