Would you lend money to a friend if you thought that there was a good chance that you'd not get all of your money back?

Good friends might make such loans in spite of the lousy prospects for repayment. But what about bankers? Should bankers lend to people in an economic environment in which the repayment dollars will almost certainly be worth less than the lent-out dollars? There is another way to ask the question. When the President of the United States keeps calling for more lending, should lenders lend even knowing that the policies of this same president and the president's Fed Chief will turn the loans into losing transactions?

At TheFremanOnline.org, Richard Fulmer writes:

A lender would hardly agree to make a $100 loan unless he could reasonably expect to get at least $100 in purchasing power in return. If the government is debasing the currency, loans will be made only if interest rates are higher than the anticipated rate of inflation.

Fulmer has nailed a fundamental problem with using "stimulus" and "quantitative easing" to goose up slow economies. Lenders decide not to lend because inflation's effects will render the repayments worth less than the money lent. The current Fed's practice of holding down interest rates only deepens lenders' losses.

And there will be compounded effects.

When the Federal Reserve Bank injects money into the economy and holds interest rates artificially low, the Fed Chief is essentially asking lenders to pretend that there exist on some economic astroplane the hard goods and services to back up cash that didn't exist microseconds ago. Intensifying matters, an artificially low lending rate may generate an initial upswing in investment and money flow, but reality must eventually set in.

The golden age will evaporate when it becomes obvious that the capital resources which the Fed Chief asked lenders to imagine were only an illusion. The bubble must burst when it becomes clear that there is immense competition to profit from far fewer goods and services than reflected by the overblown money supply. And the labor to support all the imaginary goods and services isn't available either, what with there still being 9+ percent unemployment.

As Fulmer points out, "Manipulating markets through monetary policy devalues a nation's currency, destroys rather than secures property rights, and does nothing to sustain the rule of law constraining both the rulers and the ruled." Indeed, such governmental manipulation only provides the "illusion of control." Illusion is certainly what congresses, presidents, and Fed Chiefs perpetrate on the people every time Washington manipulates the money supply, over-borrows, or monkeys around with interest rates.

When Ben reports a total cholesterol count of only 140, the man's wife praises him for taking care of himself. But the "quantitative easing" which Ben used to halve the actual 280 count has done nothing more than provide his wife with the illusion of good health. Unless removed, the excess cholesterol in Ben's blood will eventually kill him.

A writer, physicist, former high tech executive, and Cajun, Chuck Rogér invites you to sign up to receive his "Clear Thinking" blog posts by email at http://www.chuckroger.com/. Contact Chuck at swampcactus@chuckroger.com.