What is ‘Easy Money’
Easy money, in academic terms, denotes a condition in the money supply. Easy money occurs when the U.S. Federal Reserve allows cash flow to build up within the banking system as this lowers interest rates and makes it easier for banks and lenders to loan money. Therefore, borrowers can acquire money more easily from lenders.
Explaining ‘Easy Money’
Easy money occurs when a central bank wants to make money flow between banks more easily thanks to lower interest rates. When banks have access to more money, interest rates to customers go down because banks have more money they want to invest. The Federal Reserve typically lowers interest rates and eases monetary policy when the agency wants to stimulate the economy and lower the unemployment rate. The value of securities often initially rises during periods of easy money, when money is less expensive. But if this trend continues long enough, it can eventually reverse due to fear of inflation. Easy money is also known as cheap money, easy monetary policy and expansionary monetary policy.
Inflation
The Federal Reserve must carefully weigh any decisions to raise or lower interest rates based on inflation. If an easy monetary policy may cause inflation, banks might keep interest rates higher to compensate for increased costs of goods and services. Borrowers might be willing to pay higher interest rates because inflation reduces the amount of a currency’s value. A dollar does not buy as much during inflation, so the lender may not reap as much profit compared to a time of low inflation.
How Easy Money Works
An easy monetary policy may lead to lowering the reserve ratio in banks. This means banks get to keep less of their assets in cash, which leads to more money going to lenders. Because more cash goes out to borrowers, the interest rates lower. Easy money has a cascade effect that starts at the Federal Reserve and goes down to consumers.
Further Reading
- The unintended consequences of easy money: How access to finance impedes entrepreneurship – link.springer.com [PDF]
- Ultra-easy money: digging the hole deeper? – link.springer.com [PDF]
- Between Short Money Supply and the Allocation of Credit Resources [J] – en.cnki.com.cn [PDF]
- Is the current financial distress caused by the subprime mortgage crisis a Minsky moment? Or is it the result of attempting to securitize illiquid noncommercial mortgage … – www.tandfonline.com [PDF]
