Posted On: Wednesday - August 8th 2018 3:30PM MST
In Topics:   Global Financial Stupidity  Economics
(Creating Treasury Bonds is basically how the US government borrows money. People pay money for these in return for interest.)
As we promised, or threatened, depending on your interests, in the middle of our 2nd part of the discussion of America's Social Security
Back in early '17 in this post about inflation and interest, we included one paragraph each on these two topics (inflation to be covered, perhaps more interestingly, in the next post), near the bottom, before the Atlanta Rhythm Section Sky High video.
I'll keep this one simple and fairly short. Interest on money is not some magical gift, as a kid may figure, were he in an era with real, significant interest rates, that is. There are actual grown-up adults on blogs who argue that there should be no interest, per, what some Moslem idea? (Yeah, they're always booming over there, aren't they?) No, plain and simple, interest is the price paid for having the use of someone else's money. I can save up money for 2 years in order to start up my great business idea. If I have a good financial reason that says it's better to start now, though, I can borrow a sum of money to let me start making my money sooner rather than later. That would only be worth doing if I could afford to pay the PRICE of that money, the interest, and still come out better.
If another guy reckons he can make a lot better use of that money (or the same amount from someone else), then he may want to pay a higher PRICE for that use, and supply-and-demand says interest rates may go up. Yes, I put "PRICE" in caps for a reason. It's just to emphasize that interest rates are simply a price, like the price for a gallon of gas or milk. Just as in the price of a gallon of gas or milk, everyone is much better off if the free market is let to work it's wonders and the "invisible hand", termed by Adam Smith does that voodoo that it do, so well. Governments' involvement in the markets always result in tears. It's no different with interest rates.
Our Feral Gov. has been holding interest rates down in the basement, MUCH BELOW natural rates (the price of money) for ONE WHOLE DECADE now. See the graph at the post top. Peak Stupidity does not have the wherewithall to get into the complicated F.I.R.E. economy methods to do this, but we do know that they can create money with keys on a keyboard (nope, it won't work on a regular keyboard... I've tried [ctrl]-P, [ctrl]- $, etc!). The FED has been doing this to prop up the stock markets, as low interest rates mean individual savers, pension plans, etc. must put money into more risky investments, like the markets, to get the returns they had expected under rates that in normal times could be had for very safe uses of their money. This interference in the free market for use of money has kicked out one leg of the triad of support for older Americans. The more all-encompassing problem is that people and companies are encouraged by the low price of money to do things that are not worth doing. They'd have been thought about and rejected if borrowing costs were higher (i.e. using someone else's money on a boondoggle had more consequences).
Honestly, I don't know who pays the FF rate, but it has been flatlined compared to it's value in normal times.
Why have rates not been made ("let" should be the appropriate word) to rise, since the economy is supposedly going all gangbusters and all? Besides the fact that it's NOT, there will be 2 very bad things that'll happen if the FED loosens up now:
1) The stock market will tank, as those risky returns will then not beat simple purchases of Treasury Bonds. The stock market is all there is to show everyone that, hey, you're doing pretty well on paper, and the economy rocks.
2) The Feral Gov't's $21,000,000,000,000 debt will have larger interest payments on it than the < 2% or so now. Right now, as this quick glance at the national budget (taken straight outta the IRS tax form book), shows, net interest is 6 % of the expenditures. Imagine 7% rates to pay on this $21 Trillion. Now, it's 20 - 25 % of the budget! That don't look good on your bottom line, top line, any freakin' line.
Hey, these things are going to happen; it's not like I'm against a free market in the price of money. It's like getting that tooth pulled. You'd better go ahead and do it.
The pickle that the FED is in shows that it's really not good for anyone to fuck with a whole economy. This is why a guy who ran for President in 2012 was talking about this stuff! It's also why he got marginalized and left out of the news. People might have actually started paying attention.