On the surface “FA$T CA$H: Easy Credit & the Economic Crash” is a whimsical look at spending and saving, but the message is much deeper and more serious. As the Federal Reserve continues to pump cash reserves into the banking system to the tune of $40 billion per month in the ongoing quantitative easing operation, the dangers of excessive money creation are always worth noting.
As her lyrics lay out, the greatest danger of excessive money creation is that it discoordinates the activities of savers and lenders. Interest rates in market economies serve to signal to producers how patient or impatient the public is. When people save more, rates go down and producers know they can borrow more and take their time in producing things. When saving falls, rates rise and the opposite message gets sent. As the song illustrates, interest rates are like traffic lights that coordinate behavior at intersections.
What excessive money production does is to turn all of those lights green. By pushing interest rates artificially low, monetary expansion seems to tell producers that consumers wish to save more for the future. However, that’s a false signal. Consumers’ preferences haven’t changed, so now producers and consumers are working at cross-purposes. The false signal has led producers to create projects that are unsustainable and a crash must inevitably result.
We continue today to create too much “fast cash” and if we don’t stop, we will have another artificial boom as we saw a decade ago, and perhaps an equally bad bust down the road. Interest rates are one of the most important set of prices in a market economy and too much of that fast cash causes them to malfunction. The results are bad for all of us. The Fed could use to learn the lesson so clearly on display in “FA$T CA$H.”