Think Interest Rates Are High? Try Again

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By Jeffrey A. Tucker

7/28/2023

Updated:

12/21/2023

0:00

Commentary

The headlines were everywhere. The Federal Reserve has raised interest rates to a 22-year high!

This much is true: We’ve never seen rates rise this much this fast in modern times. In nominal terms, they have risen but consider the baseline, which was largely zero for the previous 15 years.

While the scale of the increases has been astounding by any standard, that’s what happens when you attempt to fix a problem with such deep roots. We’ve never seen anything like this in postwar history or really in the history of central banking.

(Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker)

The Fed’s goal was to crush inflation, which it hasn’t yet achieved. Meanwhile, there is an essential falseness to the rest of the claim that interest rates are historically high. They aren’t. Interest rates are far from high by a long-run historical standard. They’re still in the range of historically low.

Let me explain.

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Let’s say you take out a fixed-rate loan at a rate of 4 percent for 10 years. At the same time, inflation is running at 5 percent, so that the money with which you are paying off the loan is losing 5 percent per year.

Question: What is your interest rate in real terms? If you answer negative 1 percent, you are correct. If your paycheck is keeping up with inflation, you are essentially being paid to borrow.

Who gets to engage in this bit of fun? Prime borrowers such as huge corporations, and also governments, which is the whole point after all. Big shots love this system. It certainly doesn’t work well for people living on credit cards, whose market-based rates never approach zero in real terms. They always pay.

Wall Street loves this system of course. It subsidizes the most leveraged institutions and turns institutional attention away from old-fashioned concerns such as making stuff for consumers and toward churning and burning paper.

Where are we today with interest rates? Well, depending on how you want to calculate inflation, we are either at zero interest rates or slightly below. They aren’t yet in solidly positive spaces yet if you measure inflation by stick prices. They might be high in nominal terms, but inflation is still with us. That means short-term interest rates (which is the same as what lenders or T-bill holders are earning) are at a 22-year high in nominal terms.

In real terms, they could still be negative, the same as they have been since 2008.

Comparing federal funds to the current conventional consumer price index (CPI) gives us a 2 percent positive short-term rate of interest. But even that means little by historical standards. Former Fed Cahir Paul Volcker crushed the outrageous inflation of the late 1970s by imposing rates of 10 percent in real terms. We aren’t anywhere close to that.

This zero interest rate regime was the greatest disaster in the history of modern capitalism. We are nowhere near digging ourselves out of this pit. It’s a system that has dominated the 21st century, created the overclass, drove tremendous wealth inequalities, and contorted and distorted the core dynamics of the capitalist economy.

It also created the social stratification that led an entire overclass to imagine that locking down an economy was even possible. They surmised this because they obtain paychecks by staring at screens and poking at keys, and to heck with everyone else.

We haven’t even begun to reverse the damage, to say nothing of the “woke” corporate culture that this system created and prolonged.

One can only marvel at how this completely new financial system utterly spoiled an entire generation of money men. Investing was out and leveraging was in, as the scramble for return shifted from serving consumers to chasing slivers of gain wherever they could be found. In terms of capital allocation, the big money left small business and consumer services to fund large-scale projects that borrowed on the left side of the yield curve and earned on the right side.

What Ben Bernanke, and Alan Greenspan before him, achieved at the Fed was the construction of financial socialism with privatized profits for the biggest players. What was astonishing to watch through this entire period was how all of that transpired with very little public awareness, no legislation, and hardly any debate outside a small circle. It was an insider deal led by the Fed alone.

It was this system that empowered BlackRock, Fidelity, and the other biggest players who specialize in moving money. As for everyone else, real income has barely budged and economic growth has been utterly pathetic.

David Stockman explains: “In everyday family budget terms, in fact, food and energy prices have risen more in the last 6 years than they did during the prior 12 years. Owing to all this cumulative inflation, therefore, real average hourly wages have risen by barely 3.5 percent since December 2016.”

Look at the evidence from the latest GDP report. Real personal disposable income is down again. The stimulus issued by two administrations was robbed entirely by the Fed’s own policies.

Is this system coming to an end? Perhaps, but there is a very long way to go. If the Fed is really determined to crack down and reverse its past errors, it must forge ahead with rate increases. What will be the consequences? Well, consider what has taken place over two years of the crawl out of deeply negative interest rates. We’ve seen tremendous financial pressure in all the sectors that benefited from the boom times.

The white collar corporate class has been repeatedly hit with layoffs and the pressure is building for more. The bubble in overblown management structures in the highest end of corporate finance has only begun to explode. There is a genuine urgency to return to sound money and finance, halt the push toward central bank digital currencies (CBDC), and get the United States back on a sound financial footing.

Stockman, who was Reagan’s first budget director, has written a fascinating plan for Robert F. Kennedy Jr., whom Stockman believes to be the only candidate fully comprehending the need for dramatic reform of the government-corporate-regulatory complex. The plan isn’t public but here is the essence:

• Get the Fed out of Wall Street on a day-to-day basis by eliminating so-called “open market operations” and reimposing Glass–Steagall separations of banking and the securities industry. This would end the Fed’s ability to monetize debt. • End the Fed’s ability to peg interest rates at arbitrary levels but rather charge market-based rates of interest plus a penalty spread for the privilege of using the discount window. • Reinstate President Eisenhower’s fiscal policy. He reduced defense spending in real terms by nearly 40 percent during his early years in office and insisted that GOP-proposed tax cuts had to be earned through legislative action to cut spending or otherwise replace the lost revenue. This is long overdue. The military–industrial complex is forever on the hunt for wars to justify its existence. • Adopt a 21st-century supply-side model involving a large-scale “Guest Worker” program which is “essential to support the 50 percent of economic growth which has historically been attributable to increased labor supply.” • Stop the tariff wars that pass on high costs to U.S. businesses and consumers, and only create conflicts. • Bring about a 7 percent real cut in domestic spending by means-testing all entitlements and devolving Federal functions to state and local levels of government. • He finally suggests a tax on Wall Street speculation, which runs contrary to my instincts, but I see his point.

There is much more to the plan but central to it is the problem of corporatism. It isn’t enough to clean up the agencies by eliminating their corporate controls. The agencies themselves must be abolished entirely, hundreds of them. Does that sound radical? Well, these are emergency times and Mr. Kennedy ranks among those who understand the fullness of the problem here.

He has taken a strong interest in monetary issues under the influence of his uncle, who attempted to rein in the Fed with a standard of value rooted in silver. Today, the crypto industry can play a role, with bitcoin playing a big part. He would end the capital gains tax on bitcoin mining and trading and encourage the development of private monies.

It’s all a good start.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.

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