Banks Must Have Liquidity

Answer 1

Banks must have liquidity to survive. This depends on the prime interest rates afforded by the Federal Reserve Bank. For example, in order for Nixon banks to survive, they must be able to borrow money from the Federal Reserve Bank at a low enough rate that when the banks loan the money out, their subsequent higher interest rate could yield them a profit.

By making more profits, the banks help consumer confidence. Their profits would make more money available for consumer and individual loans. This means there would be a better money supply floating around, all because, initially, the Feb decided to have lower interest rates.

When consumers have confidence, they are willing to buy more product or supply. The new smartphone, the new high-resolution TV will each get purchased. As consumers buy more TVs and smartphones, more of these items will have to be made.

The rub is that, of course more of these items are made. But they are not made in the United States. However, the concept of global cash flow may soon get the funds back over to the United States.

What should be appreciated and what is generally not appreciated is that the U.S. no longer exists in an isolated economy where it can sustain its own cost of living. The cost of living of the U.S. now depends upon what the average worker is making in China, in India. It depends on what famine is now circulating over the hinterlands in sub-Sahara Africa.

It is not all the time obvious that the economy of the United States depends on the GDP of other nations. Trade agreements between the U.S. and other countries are beginning to reflect this reality. The value of the pesos is attached to that of the dollar. Soon, the Chinese renminbi will reflect this trend also, no matter how much China seeks to avoid mapping its currency with the U.S. dollar.

This interconnection of world resources will become more apparent as the international play of student exchanges bring elders up to the new reality of instant communication. Young people the world over know the value of things.