You asked if it's "just more pent-up demand?" Yes. By paying interest to keep money in the basement, they are essentially piling more dynamite behind the dam to stop the dam from breaking.

Here is the "sketchy" reality of how this mechanism is currently backfiring (as of late 2025).

1. The Fed is Losing Money (and You Are Paying for It)

You might assume the Fed just "prints" the interest payments they give to banks. It is actually worse than that.

Old Normal: The Fed used to make a profit (from the bonds they own) and send about $80-$100 Billion a year to the US Treasury. This helped pay for the government.

New Normal (2023–2025): Because they are paying so much interest to Money Market Funds (the "basement" payments), the Fed is now losing money.

The Tab: They have racked up over $200 Billion in losses (called a "deferred asset").

The Result: They stopped sending money to the Treasury. This means the US deficit is technically higher, which means the government has to issue more debt to make up the difference.

The Loop: The Fed fights inflation by paying banks -> The Fed loses money -> The US Deficit goes up -> The Government issues more bonds -> Inflationary pressure increases.

2. The "Rentier" Economy

You are correct that the people parked in the basement (Banks, Hedge Funds, MMFs) are getting "free money" to do nothing.

Who gets the money? It is not the average person. It is large institutions holding cash.

The Wealth Effect: These institutions take that risk-free 4.5% income and often reinvest it into the stock market or other assets.

The Outcome: This keeps asset prices (Stocks, Real Estate) high even while the Fed tries to crush the "real" economy to stop inflation. It creates a divide where asset owners get richer from the Fed's "fight against inflation," while wage-earners get crushed by the interest rates.

3. The "Potential Energy" Problem

This connects back to your Velocity question.

Every dollar of interest paid is a new dollar added to the pile.

Right now, that pile is sitting still (Zero Velocity).

The Risk: If sentiment changes—say, the Fed hints they will stop fighting inflation—that massive, swollen pile of cash (Principal + All that accumulated Interest) could flood out of the basement and into real goods (commodities, land, services).

The Explosion: That is when you get the "Hyperinflation" scenario. The dam breaks, and there is way more water behind it now than there was when they started building it.

(http://www.autoadmit.com/thread.php?thread_id=5808219&forum_id=2/#49495814)