Personal Finance Lesson 55 (this is an older essay, so please keep that in mind when I talk about “current events.”)
Inflation is taxation without legislation.”– Milton Friedman
This essay will be touching upon one government regulation that affects interest rates. Or rather, our inflationship with the government.
Inflation causes money to decrease in value. That is, the dollar that you might have in your pocket right now could become worth half of that within the next year. How does this happen? Well, banks run a business, and one of the ways that banks earn money is to connect the people who have extra money (savers) with the people who need money (borrowers). The banks collect interest from the borrower, keep some of it, and give the rest of it to the saver.
Now you might say, “What! How is that fair? It wasn’t the banks money – so why do they get a cut?” While it might seem unfair, it is actually not at all. The banks are doing a service to both parties – the saver and the borrower; they are connecting them. Without the banks help many people may not have been able to lend or borrow money. If you don’t want to let the bank keep the cash, you don’t have to use their service.
To increase business, banks lower interest rates making it easier for borrowers to afford. However, this can make the banks need extra cash; that is where the Fed comes to the rescue. They print more money (fake money), therefore, causing the existing money that is already in circulation to be worth less. This can cause anger to arise in people. For instance, lately, there was the Covid19 relief bill in the U.S. However, guess what? The money didn’t come directly out of President Trump’s pocket – it was printed! This creation of fake money steals wealth away from their citizens and is criminal.
In conclusion, one government regulation that affects interest rates is inflation. Inflation is the forced entrance of fake currency into the system which causes the existing currency, which is already in circulation, to have its worth degraded; essentially, making it worth less.
Consider this interesting image which shows the United States’ inflation growth in the past few months: