●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor, which leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
My friends at MMT (Modern Monetary Theory), with whom I agree on the vast majority of issues, long have declared that 0% is the “natural rate of interest.”
JOURNAL OF ECONOMIC ISSUES, Vol. XXXIX No. 2 June 2005
The Natural Rate of Interest Is Zero
Mathew Forstater and Warren Mosler
Conclusion: Under a state currency system with floating exchange rates, the natural, nominal, risk free rate of interest is zero . . . Furthermore, there are a number of reasons why allowing the rate of interest to settle at its natural rate of zero makes good economic sense.
Notice that Forstater and Mosler did not declare that 0% is the optimum or even best rate of interest. They said it makes “good economic sense.” And they said it is the “natural” rate, which seems to mean, if rates are not set by the government, rates “naturally” will settle at zero. So?
Whether or not their conclusion is correct, their point and recommendations are lacking, since:
1. The U.S. government does set rates, and
2. The government has set the rate at 0%, and
2. That “natural” rate of 0% has no discernable economic benefit, and does not “make good economic sense” — unless you’re in the upper 1% income group. I’ll explain why.
Here are excerpts from an article in the New York Times.
As Low Rates Depress Savers, Governments Reap Benefits
By CATHERINE RAMPELL, Published: September 10, 2012
A consumer complaint is ricocheting around the world: Low interest rates are eating away at savings.
Bill Taren, a retiree near Orlando, Fla., discovered in August that his credit union would pay only 0.4 percent annual interest on his saving account, even though inflation averaged 2.8 percent over the last year.
Jeanne and André Bussière, in Annecy, France, have a stable pension and a bank account that pays 2 percent interest — “almost nothing,” they say — even though the consumer price index rose an average of 2.5 percent over the last year.
Jiang Rong, an information technology professional in Xiamen, China, decided to dive back into the speculative real estate market rather than watch his savings wither at the bank.
The fact that interest yields are so low in so many parts of the world is no coincidence. Rates are determined not only by markets, but also by government policy. And right now many governments say they have good reason to keep their own borrowing costs as low as they possibly can.
One can understand why a monetarily non-sovereign nation like France wants low borrowing rates. As a user of the euro, France has no sovereign currency. It needs to pay its debts in a currency it cannot create. Low interest rates reduce its practically unpayable debt.
But the U.S. and China are Monetarily Sovereign, which means they use their own sovereign currency. They have the unlimited ability to pay their debts, by creating their sovereign currency as needed.
Though bad for people trying to live off their savings, low interest rates happen to be quite good for anyone borrowing money, like governments themselves. Over time, interest rates below the inflation rate allow governments to refinance, erode or liquidate their debt, making it easier to live within their budgets without having to resort to more unpalatable spending cuts or tax increases.
True of monetarily non-sovereign governments. Not true of Monetarily Sovereign governments. So what is going on, here?
“If you ask a central banker is that what you’re doing, and why you’re doing it, they’ll say ‘No, we’re just trying to get the economy going by making it easier for the private sector to borrow,’ ” said Neal Soss, chief economist at Credit Suisse.
“But I have a syllogism for you: The government makes the rules. The government needs the money. So why should it surprise if the rules encourage you to lend the government money?”
Wait a minute! Low rates discourage the purchase of government bonds. Bit of confusion about the real motive.
This (low rates) helped Europe, the United States and Japan slowly whittle away much of their war debt as their economies grew faster than their debt burden.
To whom did the U.S. owe “war debt”? Answer: To the private sector. In short, the U.S. government benefited from the private sector’s loss — in reality, a sneak tax.
Many major economies are already slowing down, if not outright contracting. And the actions taken by governments to keep interest rates low can restrain how much savers have to spend and force fragile banks and pension funds to take on more risk.
Amen, brother. And here is why the government keeps rates low. It’s not for the phony reason given, i.e. to stimulate the economy by easing borrowing. Low rates don’t stimulate the economy. The government keeps rates low as a way to reduce the federal deficit.
And as we have learned, reduced deficits lead to recessions, which hurt the lower-income 99% more than the upper 1%, and so increase the gap between rich and poor. Interest rate reduction reduces federal spending.
Gross Domestic Product = Federal Spending + Non-federal spending – Net Imports
Reduce federal spending and you reduce GDP. Period.
Ireland and France, for example, have required or “encouraged” pension funds to invest in more government debt.
In Spain, fragile banks have been arm-twisted into lending to the government, which forces down the interest rates that the banks can pay to depositors. The Spanish government also capped the amount of cash that could be withdrawn from bank accounts, which prevented people from seeking higher yields elsewhere.
Now we’ve returned to the monetarily non-sovereign Ireland, France and Spain, which do need to reduce deficits, but politically can’t raise taxes much, so they use the sneak tax of low interest rates.
And in the United States, the Federal Reserve is buying up government debt to keep interest rates even lower than what markets would otherwise pay. In the nearly four years that the Fed set its benchmark interest rate at zero, the government has saved trillions of dollars in interest payments.
If interest rates today were what they were in 2007, the Treasury would be paying about twice as much to service its debt.
Translation: The federal government has reduced GDP by trillions of dollars.
Inflation in the United States is very low by historical standards, but interest rates are so paltry that savers are losing money anyway.
Of course, any economic policy will produce winners and losers, and it seems unlikely that policy makers are deliberately sacrificing retirees either to stimulate the economy or to grind down government debt.
More likely, older Americans and other savers are just unintended casualties of policies aimed at other economic targets, particularly the policy making it easier for consumers and companies to borrow.
“Unintended” casualties? The Fed, loaded with economists, doesn’t understand what’s happening?? Gimme a break!
“If you care about the distribution effects of these policies, and being fairer to the elderly or other people, that seems to argue for carefully designed fiscal stimulus,” said Robert J. Shiller, an economics professor at Yale.
But, he added, “the whole reason we like using monetary policy is that it avoids those very political discussions of who gets taxed.”
Absolutely, 100% correct. It goes like this:
1. Low interest rates are the federal government’s method for reducing the federal deficit without the political danger of raising taxes.
2. Reducing the deficit is recessionary.
3. Recessions hurt the lower income classes the most, thereby increasing the gap between rich and poor.
In summary, low rates hurt the entire private sector. Although the rich are hurt by low rates, the poor are hurt more, because they not only suffer from reduced interest income, but also from the recession — a double whammy.
The notion that the Fed, which is owned by the 1%, doesn’t understand this is ludicrous. It’s the perfect sneak tax on the 99%. It’s the perfect way to increase the income gap between rich and poor.
Rodger Malcolm Mitchell
Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America’s 99%
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports