When Money is Free

Interest rates aren't just some arbitrary number pulled out of the air by central bankers and credit card companies.

In a market economy, interest rates are the price of money. I'm not breaking any new ground on this revelation.

But when money (the Federal Reserve Note in this case) essentially has no price because that price is fixed at or near zero by a government enforced monopoly (the Federal Reserve) something strange begins to happen.

We're living through that strangeness right now. Money is extremely cheap to acquire. The Fed set the price of money low because they're trying to stimulate borrowing and spending.

But borrowers and spenders don't seem to be interested in taking the bait – possibly because they already have enough debt, or because they believe interest rates will head still lower.

And lenders are reluctant to lend because there's a minimal benefit to lending long term vs. short term. And hey, it looks like rates are so low that they'll only rise from here. Why lend today at X% when you might be able to lend next month for X+1%?

So it seems like the price of money doesn't seem to be the issue.

If you drop the price on a product, and you still don't have buyers, then you have to wonder if it isn't the price, but rather the good or commodity that's the problem.

We're seeing this dollar apathy play out in Treasury Bond auctions. The Treasury has a certain amount of bonds, notes and bills they want to sell every month – but when they don't sell out, the Fed steps up and soaks up the remainder.

It's like a bake sale where schoolteachers buy up all the leftover cookies.

The fallout, of course, is that America's savers and scrimpers get no yield. The price of money hurts the most productive and responsible members of the economy.

Federal Reserve chairman's big middle finger to retirees and workers is that they will not receive any return on their safe investments.

Go risky, or get nothing.

But money isn't free – even if the Fed says so.

The price you pay right now for holding dollars is uncertain. Inflation data is so beset by complexity and exceptions to rules not even a trained economist can keep straight.

And that's the real danger for the dollar. No one knows what will happen next month. There's no bedrock of common understanding for the dollar to lean on. No one is sure where the dollar's value will be in a year from now. How can anyone make a long-term financial decision in this type of climate?

That's why we're seeing wild swings in asset prices – especially in risk-assets like stocks. The unit of account is so uncertain that people flock into and out of these peripheral assets on a week to week basis.

Pay attention to the dollar now. This kind of uncertainty is not healthy for any currency, nor does it create any measure of safety or reliability for any asset class.