The chart on the right shows negative impact of Quantitative Easing (lower interest rates and increased money volumes,
through bank issued debt1
which has resulted in the migration of money to FICRESS2
assets (blue line
) leading to a starvation of real investment and returns and in particular real incomes of lower income segments (green line
). Moving from quantitative easing and with monopoly imposition of higher interest rates (orange line
) bank deposits rise to gain interest payment as returns. However, the interest rates become prohibitive for real sector investment.
In the case of the natural interest rates3
and real incomes Price Performance Policy (PPP) transforms the real incomes response curve to the real incomes price performance response curve augmenting returns on investment and real income levels, in particular, reducing the precariousness of the lower income segments. Moving from quantitative easing but without policy intervention by imposing higher interest rates than the natural rate the response is shown as the PPP curve (red line
). This significant gain in real incomes and returns on investment arises from a reduction in inflation4
, a recovery of higher returns on savings, the draining of speculative FICRESS activity and incentive for banks to advance loans at reasonable rates for investments in the real economy.