Did you know, raising interest rates kills economic growth? Nah, it’s a myth

Twitter: @rodgermitchell; Search #monetarysovereignty
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It takes only two things to keep people in chains: The ignorance of the oppressed and the treachery of their leaders..
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Do you believe any of these popular myths about our economy:

 

1. The federal deficit is too high.
2. Federal deficit spending (aka “printing money”) causes hyperinflation
3. The federal debt is “unsustainable.”
4. Our children will pay for the federal debt
5. Federal taxes fund federal spending.
6. The federal government can run short of dollars.
7. The federal government should live within its means
8. Federal finances are like personal finances.
9. The International Monetary Fund (IMF) benefits poor nations
10. Federal debt crowds out private debt
11. Federal spending crowds out private spending
12. The poor are lazy, dishonest “takers”; the rich are smart, energetic “makers.”
13. The U.S. government should be run like a business, by a businessperson
14. Austerity helps an economy grow.
15. Some people don’t pay their “fair share” of federal taxes
16. Raising interest rates kills economic growth.
17. If you cross your fingers for the next hour, your baseball team will win.

O.K., that last one isn’t economics, but it’s just as scientifically factual as the others.

You can see a more complete list of common, economics myths at: Which of these myths do you believe? A test of your knowledge.

Today’s post focuses on myth #16, which the duplicitous and the uninformed promulgate on a weekly, if not hourly, basis, especially when the Fed announces an interest rate hike.

Here are excerpts from a typical article written by a noted debt fearmonger:

Dear Mr. President, Be Careful What You Wish for: Higher Interest Rates Will Kill the Recovery
Posted on June 11, 2017 by Ellen Brown,

Higher interest rates will triple the interest on the federal debt to $830 billion annually by 2026, will hurt workers and young voters, and could bankrupt over 20% of US corporations, according to the IMF.

Ah, the IMF, the International Monetary Fund, the group that always, always, always prescribes austerity as a cure for a failing economy — essentially prescribing leeches to cure anemia.

Is the IMF composed of liars, or of incompetents? Hard to tell — but they are led by Christine Lagarde, who embodies huge dollops of both attributes.

Responding to earlier presidential pressure, the Federal Reserve is expected to raise interest rates this week for the third time since November, from a funds target of 1% to 1.25%.

An increase in the base rate, however small, will tighten the screw on younger voters and some of the poorest communities who rely on credit to get by.

Allow us to place this into some sort of context. The interest increase of .25% on a $5,000 loan amounts to less than the cost of one extra pack of cigarettes every 3 months — not much of a “screw tightening.”

More importantly for his economic programme, higher interest rates in the US will act like a honeypot for foreign investors . . . . [S]ucking in foreign cash has a price and that is an expensive dollar and worsening trade balance. . . .

It might undermine (Trump’s) call for the repatriation of factories to the rust-belt states if goods cost 10% or 20% more to export.

Higher interest rates will attract investors to U.S. dollars, thereby strengthening the dollar. A strong dollar makes imports less costly, which is one reason why interest rate increases fight inflation.

And those cheaper imports particularly benefit the “younger voters and some of the poorest communities” about whom Ellen Brown expressed such concern.

As for the “repatriation of factories to the rust-belt states,” that was just a con-job by Trump, along with “I will save the coal industry,”  and “The Keystone oil pipeline will create thousands of jobs.”

There will be no “repatriation” of factories unless two things happen, neither of which is attractive or likely:

1. American wages drop below the level of 3rd world nation wages
2. Automation ceases to be the primary job-consuming, efficiency-building factor in America

Raising interest rates benefits financial institutions, due to a rise in interest on their excess reserves and net interest margins (the difference between what they charge and what they pay to depositors).

This neither adds nor subtracts dollars from the economy. It just changes the flow. Borrowers will pay more dollars to lenders and depositors. But there is one important benefit to the economy:

The hardest hit will be the federal government.

According to a report by Deloitte University Press republished in the Wall Street Journal in September 2016, the government’s interest bill is expected to triple, from $255 billion in 2016 to $830 billion in 2026.

Said another way, “the government will pump many hundreds of billions of additional stimulus dollars into the economy every year, reaching $575 additional stimulus dollars in the year 2026.

This stimulus will be a boon to economic growth while costing Americans nothing.

The Fed returns the interest it receives to the Treasury after deducting its costs.

That means that if, rather than dumping its federal securities onto the market, it were to use its quantitative easing tool to move the whole federal debt onto its own balance sheet, the government could save $830 billion in interest annually – nearly enough to fund the president’s trillion dollar infrastructure plan every year, without raising taxes or privatizing public assets.

That’s Brown’s restatement of the “Federal taxes fund federal spending” myth. After all these years, she still doesn’t understand that unlike state and local governments, the federal government uniquely is Monetarily Sovereign.

As such, it creates its sovereign currency, the dollar, by the act of paying bills. Every time the government pays a bill, it creates new dollars, ad hoc. Even if all federal tax collections fell to $0, the federal government could continue spending, forever.

As noted by fund manager Eric Lonergan in a February 2017 article, “The Bank of Japan is in the process of owning most of the outstanding government debt of Japan (it currently owns around 40%).”

Forty percent of the US national debt would be $8 trillion, three times the amount of federal securities the Fed holds now as a result of quantitative easing. Yet the Bank of Japan, which is actually trying to generate some inflation, cannot get the CPI above 0.2 percent.

Oh, what a surprise. The Bank of Japan, rather than the people of Japan, receives the interest on 40% of government securities, and this does not generate inflation.

Well, of course not. With no increase in the money supply, inflation is not stimulated.

The Deloitte report asks: Since the anticipated impact of higher interest rates is slower growth, the question becomes: why would the Fed purposely act to slow the economy? We see at least two reasons.

First, the Fed needs to raise rates so that it has room to lower them when the next recession occurs. And second, by acting early, the Fed likely hopes to choke off inflationary pressure before it starts to build.

Really? “The anticipated impact of higher interest rates is slower growth”?

Over the 25-year period, 1955-1980, interest rates averaged higher as GDP growth increased. From 1980-2015, interest rates averaged lower while GDP growth also fell.

There is zero evidence to support the myth that interest rate increases cause slower growth.

Now, the Fed wishes to raise the rate from 1% to 1.25%, still historically low, and the Ellen Browns of the world are panicked.

The Fed is paying 1% (soon to be 1.25%) on $2.2 trillion in excess reserves.

At 1%, that works out to $22 billion annually. At 1.25%, it’s $27.5 billion; and at 3.5% by 2020, it will be $77 billion, most of it going to Wall Street megabanks.

This tab is ultimately picked up by the taxpayers.

Wrong again. Ms. Brown, please repeat this to yourself, again and again, until you learn it: “Taxpayers do not fund federal spending.”

Among other possibilities, an extra $22 billion annually accruing to the federal government would be enough to end homelessness in the United States.

Instead, it has become welfare for those Wall Street banks that largely own the New York Fed, the largest and most powerful of the twelve branches of the Federal Reserve.

And wrong, yet again. If $22 billion annually is enough “to end homelessness” in the United States, nothing stops the federal government from spending it. The government cannot run short of its own sovereign currency.

Better yet, the government should institute the Ten Steps to Prosperity (below).

Ellen Brown is an attorney, founder of the Public Banking Institute, a Senior Fellow of the Democracy Collaborative, and author of twelve books including Web of Debt and The Public Bank Solution. She co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

Sad, but she can’t help it. Even if she understands the truth, there is no way she can admit it after twelve books, a radio show and 300+ blog articles devoted to the myth that raising interest rates kills the economy.

Excessive inflation however, does kill an economy, and that is what the Fed wishes to prevent.

Rodger Malcolm Mitchell
Monetary Sovereignty

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The single most important problems in economics involve the excessive income/wealth/power Gaps between the have-mores and the have-less.

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of The Ten Steps To Prosperity can narrow the Gaps:

Ten Steps To Prosperity:
1. ELIMINATE FICA (Ten Reasons to Eliminate FICA )
Although the article lists 10 reasons to eliminate FICA, there are two fundamental reasons:
*FICA is the most regressive tax in American history, widening the Gap by punishing the low and middle-income groups, while leaving the rich untouched, and
*The federal government, being Monetarily Sovereign, neither needs nor uses FICA to support Social Security and Medicare.
2. FEDERALLY FUNDED MEDICARE — PARTS A, B & D, PLUS LONG TERM CARE — FOR EVERYONE (H.R. 676, Medicare for All )
This article addresses the questions:
*Does the economy benefit when the rich can afford better health care than can the rest of Americans?
*Aside from improved health care, what are the other economic effects of “Medicare for everyone?”
*How much would it cost taxpayers?
*Who opposes it?”
3. PROVIDE A MONTHLY ECONOMIC BONUS TO EVERY MAN, WOMAN AND CHILD IN AMERICA (similar to Social Security for All) (The JG (Jobs Guarantee) vs the GI (Guaranteed Income) vs the EB (Economic Bonus)) Or institute a reverse income tax.
This article is the fifth in a series about direct financial assistance to Americans:

Why Modern Monetary Theory’s Employer of Last Resort is a bad idea. Sunday, Jan 1 2012
MMT’s Job Guarantee (JG) — “Another crazy, rightwing, Austrian nutjob?” Thursday, Jan 12 2012
Why Modern Monetary Theory’s Jobs Guarantee is like the EU’s euro: A beloved solution to the wrong problem. Tuesday, May 29 2012
“You can’t fire me. I’m on JG” Saturday, Jun 2 2012

Economic growth should include the “bottom” 99.9%, not just the .1%, the only question being, how best to accomplish that. Modern Monetary Theory (MMT) favors giving everyone a job. Monetary Sovereignty (MS) favors giving everyone money. The five articles describe the pros and cons of each approach.
4. FREE EDUCATION (INCLUDING POST-GRAD) FOR EVERYONE Five reasons why we should eliminate school loans
Monetarily non-sovereign State and local governments, despite their limited finances, support grades K-12. That level of education may have been sufficient for a largely agrarian economy, but not for our currently more technical economy that demands greater numbers of highly educated workers.
Because state and local funding is so limited, grades K-12 receive short shrift, especially those schools whose populations come from the lowest economic groups. And college is too costly for most families.
An educated populace benefits a nation, and benefitting the nation is the purpose of the federal government, which has the unlimited ability to pay for K-16 and beyond.
5. SALARY FOR ATTENDING SCHOOL
Even were schooling to be completely free, many young people cannot attend, because they and their families cannot afford to support non-workers. In a foundering boat, everyone needs to bail, and no one can take time off for study.
If a young person’s “job” is to learn and be productive, he/she should be paid to do that job, especially since that job is one of America’s most important.
6. ELIMINATE FEDERAL TAXES ON BUSINESS
Businesses are dollar-transferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the federal government (the later having no use for those dollars). Any tax on businesses reduces the amount going to employees, suppliers and shareholders, which diminishes the economy. Ultimately, all business taxes reduce your personal income.
7. INCREASE THE STANDARD INCOME TAX DEDUCTION, ANNUALLY. (Refer to this.) Federal taxes punish taxpayers and harm the economy. The federal government has no need for those punishing and harmful tax dollars. There are several ways to reduce taxes, and we should evaluate and choose the most progressive approaches.
Cutting FICA and business taxes would be a good early step, as both dramatically affect the 99%. Annual increases in the standard income tax deduction, and a reverse income tax also would provide benefits from the bottom up. Both would narrow the Gap.
8. TAX THE VERY RICH (THE “.1%) MORE, WITH HIGHER PROGRESSIVE TAX RATES ON ALL FORMS OF INCOME. (TROPHIC CASCADE)
There was a time when I argued against increasing anyone’s federal taxes. After all, the federal government has no need for tax dollars, and all taxes reduce Gross Domestic Product, thereby negatively affecting the entire economy, including the 99.9%.
But I have come to realize that narrowing the Gap requires trimming the top. It simply would not be possible to provide the 99.9% with enough benefits to narrow the Gap in any meaningful way. Bill Gates reportedly owns $70 billion. To get to that level, he must have been earning $10 billion a year. Pick any acceptable Gap (1000 to 1?), and the lowest paid American would have to receive $10 million a year. Unreasonable.
9. FEDERAL OWNERSHIP OF ALL BANKS (Click The end of private banking and How should America decide “who-gets-money”?)
Banks have created all the dollars that exist. Even dollars created at the direction of the federal government, actually come into being when banks increase the numbers in checking accounts. This gives the banks enormous financial power, and as we all know, power corrupts — especially when multiplied by a profit motive.
Although the federal government also is powerful and corrupted, it does not suffer from a profit motive, the world’s most corrupting influence.
10. INCREASE FEDERAL SPENDING ON THE MYRIAD INITIATIVES THAT BENEFIT AMERICA’S 99.9% (Federal agencies)Browse the agencies. See how many agencies benefit the lower- and middle-income/wealth/ power groups, by adding dollars to the economy and/or by actions more beneficial to the 99.9% than to the .1%.
Save this reference as your primer to current economics. Sadly, much of the material is not being taught in American schools, which is all the more reason for you to use it.

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.

MONETARY SOVEREIGNTY