–Low interest rates: The sneak tax on you.

Mitchell’s laws:
●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.”

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 rich are perfectly happy to see their income reduced so long as the gap is increased.

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
Monetary Sovereignty


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


24 thoughts on “–Low interest rates: The sneak tax on you.

  1. Fantastic analysis. Great disclosure.
    Just one question.
    “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.”

    Why, why, are we paying interest, and even compound interest on our own unlimited currency ?
    Have the 1% proven P T Barnum wrong? You can fool all the people all the time ? Or as someoneelse said,”Repeat a lie often enought and it will become truth”.


    1. Federal “borrowing” merely is the sale of T-securities, not necessary for our Monetarily Sovereign government, but not financially harmful either. The interest pumps dollars into the U.S. economy and the world economies, both beneficial.

      If the U.S. chose, it could pay $999 trillion in interest payments tomorrow. No problem for our government.


  2. One argument for having government pay nothing for borrowed money (i.e. aiming for a zero rate) is that all the arguments for government borrowing are B.S., as I explain in detail here:


    The ACTUAL REASON for government borrowing is that it enables politicians to buy votes. That is, voters tend to notice tax increases far more readily than they do the effect of extra government borrowing.

    Milton Friedman advocated a zero government borrowing regime. See para starting “under the proposal…” (p.250) here

    Click to access friedman.pdf

    But that’s not to say governments should not issue lilabilities in the form of monetary base. I fully agree with the MMT idea that if the privat sector is not spending enough, the government / central bank machine should create and spend extra money into the economy.


  3. The private sector creates dollars by lending. But those are “temporary” dollars, which disappear when the loans are repaid. The private sector creates zero long-term dollars.

    The federal government creates “permanent” dollars, which disappear only when taxes are paid. That is why federal deficit spending is necessary.

    An economy cannot grow based on private sector (temporary) dollar creation alone. It must have permanent dollars coming in from the central government.

    Therefore, the private sector cannot “spend enough,” and the federal government must “create and spend extra money into the economy.


  4. Roger…re yr sentence below, can u explain how the Fed is owned by the 1%.?

    “The notion that the Fed, which is owned by the 1%, doesn’t understand this is ludicrous.”


    1. The Federal Reserve Board is appointed by a politician — the president of the United States, and approved by additional politicians — the U.S. Senate. Figuratively speaking, U.S. politicians are owned by the 1%, as is seen in the current election.

      Legal ownership of the Federal Reserve banks is held by stockholders, the vast majority of which are member banks, run by wealthy bankers.

      You can Google “Federal Reserve Ownership” to get a full explanation of legal ownership, though probably not of political ownership.


  5. The point behind the phrase ‘the natural rate of interest is zero’ is to disabuse people of the widespread notion that interest rates are controlled by the market, specifically the government bond market. You may say ‘so what?’ but I happen to think it’s a very important point about how our money system really works.

    The federal government has no need to borrow when it is sovereign in its own currency, so it has no need to pay interest to anyone. The fact is that interest payments on government bonds are just free money. (You know this better than almost anyone.) I would prefer to have a system under which that fact is openly acknowledged so that we can have a genuine public debate over what level of free money to bond holders is appropriate.

    What rate do you propose, Rodger, and why? I don’t see any argument here as to how that should be determined, only a complaint that rates are too low because they don’t create as much free money as you would like. The poor are hurt more than bondholders by low interest rates? Perhaps. But surely there are far better channels for the government to get free money into the hands of the poor without first channeling it through the sticky fingers of wealthy bond holders?


    1. If “disabusing” is the purpose, how has that worked out?

      But Clark, I agree with everything you say.

      The only reason to issue T-securities is to pump interest dollars into the economy, but you are correct. There are far better ways to do that than via T-securities.

      Meanwhile, as for the optimum rate, I suggest something about 1% above the then current inflation rate.


      1. There is a second reason, and an important requirement of the 1%. The investment class needs a place to invest, or park, large sums of money in a riskless financial vehicle.


  6. Roger M Mitchell, “The private sector creates dollars by lending. But those are “temporary” dollars, which disappear when the loans are repaid. The private sector creates zero long-term dollars.”

    Translated: When the private for-profit bank makes a loan for $1million with a rate of 4% for 18 years they create $1 million in “temporary money” which they credit into the borrowers account. So does that mean they can’t spend it, get goods and services just like real money?

    Why borrow it and pay interest on it?

    To pay this loan with payments of almost $10,00 per/month being sucked out of the borrowers wallet and into the hands of the for- profit bank that issued this “temporary money” really doesn’t have to be. Why pay back with real money in circulation, when they can mail back a rubber check from their “temporary money balance”.


  7. “So does that mean they can’t spend it, get goods and services just like real money?”

    Borrowers use borrowed money to pay for goods and services. When they repay the note, the no longer can use that money to pay for goods and services.

    If they repay with a bad check, they go to jail.


    1. If they repay with a bad check, they go to jail. Not if they have a giant check-kiting scheme with other enterprizing fellows. As in running a TBTF bank. Just get big enough so that you can bribe/fool people into thinking that ending your frauds will endanger the economy & make the sky fall. It really helps if you get a seat on the Fed’s board too!


  8. A little off topic question Roger.

    I have heard many TV pundits yammer on about unwinding the FEDs’ balance sheet when we are at that magical recovery point sometime in the future. It seems to me that it never needs to be unwound. It would seem to me that MBS, bonds etc. could be left on the FED balance sheet for an eternity. No?


    1. Right, the Fed doesn’t need to “unwind” anything. But the bonds eventually will “unwind” themselves as they come due.

      Also, if QEIII actually stimulated the economy (It doesn’t), then “unwinding” would slow the economy, so why would anyone want that — ever?

      Just another case of people not understanding the difference between Monetary Sovereignty and monetary non-sovereignty.


  9. Most people, including wall street, think the primary objective of QE’s is to stimulate the economy. Wall street rejoiced the day QE3 was announced. Isn’t QE3 equivalent to additional FED spending, and therefore boost GDP? Thanks.


    1. The QEs merely exchange one type of dollar (Fed dollars) for another type of dollar (T-bonds). This adds to the demand for T-bonds, which increases the price of T-bonds, which in turn, reduces long-term interest rates.

      The Fed wrongly says that low interest rates are economically stimulative. However, evidence shows this is not the case. See: https://rodgermmitchell.wordpress.com/2009/09/09/low-interest-rates-do-not-help-the-economy/


  10. Roger M Mitchell, “The private sector creates dollars by lending. But those are “temporary” dollars, which disappear when the loans are repaid. The private sector creates zero long-term dollars.”

    Justaluckyfool states,”Translated: When the private for-profit bank makes a loan for $1million with a rate of 4% for 18 years they create $1 million in “temporary money” which they credit into the borrowers account.At this point it is not a zero sum game in the real world. Yes, in the accounting ,bank ledger world, the asset (loan) goes in the ledger as $1 million so: 1 out minus 1 in == 0. But there is no accounting that the borrower can purchase $1 million in goods or services (Exp., Gold) store it in Brazil. If the borrower defaults and goes to Brazil that changes the zero to a $1 million loss.
    Someone has to make that deal whole i.e., put in $1 million. You only have a zero sum game when the ‘temporary money is returned.
    But even more important is what happens when the note is paid in full.
    The created temporary amount of $1 million at 4% for 18 years isn’t a zero sumgame either because ! out becomes 2 in since 1 at 4% for 18 years becomes 2. How the PFPB ‘print’ temporary money’ and by using taxation (interest) get to replace their temporary create while at the same time suck out of the economy an additional equal amount as a profit for themselves.
    How can one sector gain profits that are greater than wealth itself?
    WHAT IF…..PFPB have loans outstanding on residential and commercial real estate in the amount of $100 trillion all with an average 4% for 36 years.The actual wealth would be the $100 trillion in real estate. Yet the PFPB would receive $400 trillion as payment in full. Yes they would have to return the $100 ‘temporary money’ but they would have $300 trillion of “real money” to use as bribes or what ever they wish. And guess what, based on todays laws they do not even have to use any of their own money to do this for they need only have in storage other peoples money.
    Don’t you think its time to CHANGE THE GAME? (GOOGLE- “The Switch Game: Where ever you read PFPB change that to CBWFTP” )


  11. I’m a bit confused..in a video of Wray and Mitchell (https://www.youtube.com/watch?v=jm_yc6Dk870 & https://www.youtube.com/watch?v=C1VXGEciwiI) where they are asked why central banks set interest rates, they said it is purely policy driven, and Wray then said, if it was me I would just let rates go to zero or to their natural level, which in normal times would be zero on account that government spending would increase reserves more than taxes and bond selling would drain them.

    Seeing as you both advocate MMT, are you able to explain why Wray (and presumably Mitchell) advocate zero interest rates, or allowing the rate to go to its natural level, and yet you explain here the opposite? I’m not suggesting you or Wray are wrong, what I am wanting to determine is why I am being told two different things, and if there is a reason for this discrepancy that can be explained?


    1. I do not know why “0” is a “natural” rate or even what a “natural” rate is. Further, I do not know why they advocate zero interest rates.

      I do not advocate zero interest rates. A (for instance) 2% base rate would have the government adding millions of dollars to the economy, which is stimulative.

      While IMS agrees with MMT regarding the facts of the economy, MS disagrees with some MMT action proposals


      1. ok..i was just wondering..it was something he said in that video and it seemed to me to suggest that it meant it was a natural by-product of the government spending more than it was taxing/selling bonds etc, because it means the banking system as a whole had more reserves… i would ask him myself but he doesn’t seem to have a website..

        no matter..eventually i’m sure i’ll find out why


  12. Dean, here is an article that will (or actually won’t) answer your question:


    The whole thing is part of Randy Wray’s “price stability, full employment” MMT concept, that not only is impossible to define and impossible to achieve, but so filled with holes as to be laughable.

    It’s what led to the equally laughable Jobs Guarantee idea.

    I challenge anyone to:
    1. Define in detail, “price stability”
    2. Define in detail, “full employment”
    3. Explain why either one should be our economic goal.

    MS’s preference for an economic goal: Narrow the Gap by raising the lower-income, lower-power groups, (the Ten Steps to Prosperity).


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