THOSE NEGATIVE INTEREST RATES

The widely popular negative interest pushed by politicians as stimulus is financial snake oil, a scam. Even people outside central Africa worry about Ebola with its 50% mortality; far too few worry about negative interest though its financial mortality is ultimately 100%. Instead of receiving rent for the use of  your money, you are paying someone to use it for their benefit at your risk. The politicians pushing this are not stupid; it is your money at risk, not theirs. That is why they are generous with it, using the cheap money to promote unproductive grants and risky loans.

Interest must compensate a lender for both the loss of use of his money and the risk of its loss. When rates are set in a free market, those are accomplished by competition among large numbers of potential lenders; when rates are set by government fiat, political goals interfere with and prostitute those calculations. With rates politically depressed, the first victims are savers and pension plans: savings dry up and pensions become more expensive as payment must depend upon better returns from more risky investments. Naturally low risk, low paying investments can no longer attract money. The result is a highly distorted economy where market valuations cannot reflect fair value, forcing a decline upon the quality of investment decisions, raising general risk. Eventually, this becomes unsustainable and collapses of accumulated uneconomic decisions. Unfortunately, “eventually” can, in a large country, be measured in decades.

The currency is another victim of the scam: when the price of its use is artificially depressed, it loses purchasing power, i.e. it is inflated. That is presently most visible in U.S. housing prices and the stock market, where the bulk of Federal Reserve monetary creation has been centered. Through its long cheapening of the U.S. dollar, the Federal Reserve has promised to restore true market rates when the economy stabilized but that appears politically impossible, an reassuring illusion. Restoration of reality seems to await either an overnight financial collapse or a descent into hyperinflation. One or the other is inevitable; if God is not mocked, neither is economic reality in His universe.

President Trump is publicly leaning hard on the Federal Reserve to prolong and even increase its already protracted suppression of interest rates; the central bank shows evidence of responding. The President’s opponents are talking up a recession, likely hoping that Prez Trump will take the heat before the next presidential election. It appears that the Federal Reserve top management is, as is the U.S. generally, split along pro and anti-Trump lines; the actual direction of Federal Reserve current manipulations must be guesswork. Significantly lower rates will support the President; a modest gesture will not. Regardless, a financial denouement seems inevitably scheduled for Trump’s administration; his second if not his first. Financial prophecy too seems to draw negative interest now, but reality waits, showing decreasing patience.

About Jack Curtis

Suspicious of government, doubtful of economics, fond of figure skating (but the off-ice part, not so much) Couple of degrees in government, a few medals in figure skating; just reading and suspicion for economics ...
This entry was posted in Economics, Goverrnment, Politics, Uncategorized and tagged . Bookmark the permalink.

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