Interest rates going up: Should you be concerned?

It takes only two things to keep people in chains:

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The ignorance of the oppressed

and the treachery of their leaders.

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Interest rates going up: Should you be concerned?

The answer: Well . . .  maybe and maybe not. Here are excerpts from an article by the anti-debt Committee for a Responsible Federal Budget (CRFB):

Rising Rates Could Further Balloon Interest Spending

Mar 21, 2018

The Federal Open Market Committee (decided) to raise the federal funds rate by 0.25 percentage points to 1.5-1.75 percent.

The federal government (is projected) to spend $6.8 trillion on interest costs over the next decade. If interest rates end up just 1 percentage point higher than projected, interest costs would increase by a further $2 trillion. If interest rates return to their pre-recession levels, costs could rise by $3.4 trillion.

Let us rephrase as follows:

The federal government (is projected) to pump $6.8 trillion interest dollars into the economy over the next decade.

Should a $6.8 trillion stimulus — which is similar in effect to a $6.8 trillion tax cut — be a cause for concern?

A large economy contains more money than does a smaller economy. The U.S. has a larger money supply than does California, which in turn, has a larger money supply than does Los Angeles.

This overly-simple example shows that to grow from smaller to larger, an economy usually needs an increased money supply. The projected $6.8 trillion in federal interest payments will produce an increased money supply and economic growth.

Federal deficit spending, which increases the money supply, is the method by which the federal government cures recessions:

The above graph shows that federal deficit spending stimulates the economy to cure recessions. In the late 1990s, the federal government ran a surplus, which caused a recession. 

That being the proven case, one wonders why anyone would be anti-deficit.

Projected interest rates are notably below historic levels.

Most experts believe we will remain below these levels due to slower productivity growth, greater income inequality, higher demand for safe assets, higher foreign capital inflows, and generally observed reductions in global interest rates, but low interest rates are by no means a given.

If “reductions in global interest rates” are paired with “slower productivity growth” and “greater income inequality,” why would anyone favor low interest rates?

Under CBO’s interest rate assumptions, we recently estimated interest costs will quadruple in a decade or so. We projected interest will rise from $263 billion in 2017 to $965 billion in 2028 under current law and to $1.05 trillion in 2028 assuming various expiring policies are extended. In either of these scenarios interest costs (in percent of GDP) would represent a historic record.

To paraphrase, the CBO estimates that by 2028, our Monetarily Sovereign government will pump $965 billion – $1.08 trillion stimulus dollars annually into our economy.

The CBO implies that this must, in some unstated way, be bad for you. The CBO never says why, instead implying that large federal debt is similar to large personal debt.

It isn’t.

(We) project the debt-to-GDP ratio will rise from 77 percent of GDP today 101 percent of GDP by 2028. The historical record level of debt held by the public as a percent of GDP for the United States is 106 percent, set just after World War II.

We assume the warning about the debt-to-GDP ratio is supposed to frighten you, for some reason. But aside from the reason never being stated, there are two problems with the implied warning:

1. The so-called federal “debt” isn’t a real debt. It is deposits onto into T-security accounts, that really are something like interest-paying safe deposit boxes.  The dollars go in, interest money is added, and at maturity, the dollars go back. Our federal government, being Monetarily Sovereign, uses those dollars.
2. Even if the so-called “debt” were real debt that the government actually used (as with state and local government debt), the federal government, being Monetarily Sovereign, could pay it all off, simply by creating new dollars.

Here is a graph comparing GDP growth with the Debt/GDP ratio. It shows that changes in the ratio — up or down — do not affect our economic growth.

This is one of the reasons we say that the Debt/GDP ratio is meaningless. The ratio compares the historical total of deposits into T-security accounts that still exist, with the value of all goods and services produced in one year. It would be difficult to find two more dissimilar, unrelated measures in all of economics.

The ratio has nothing to do with the federal government’s solvency or ability to spend. The ratio has nothing to do with any need for future tax collections. The ratio has nothing to do with our economic growth or lack thereof.

In astrology, the motions of the planets are compared with future personal events.

 Debt/GDP ratio is economic astrology. It measures nothing.

Lawmakers need to reverse course to reduce the interest burden and the exposure to eventual higher interest rates.

“Interest burden”? Paying interest is no burden on our Monetarily Sovereign federal government. Even without collecting a penny in taxes, our federal government is capable of paying infinite amounts of interest.

Taxpayers do not fund the federal government’s interest payments or any other federal spending. The U.S. government created the very first dollars from thin air. It still creates dollars from thin air, merely by pressing computer keys. It cannot run short of its own sovereign currency.

So do not fret. Despite all the “Henny Penny” warnings, a high deficit, high debt, or high Debt/GDP ratio will not doom your children and grandchildren to higher taxes.

There is some debate about how interest rate increases affect the private sector. Most interest neither adds nor subtracts dollars from the total world economy. Interest just circulates, with some individuals and businesses paying more and some receiving more.

With higher interest rates, the public will pay more for loans and for products/services provided by borrowers. Meanwhile, the public will receive more from bonds, CDs, and interest-paying bank accounts.

So depending on your position in the economy, higher interest rates can help you or hurt you.

But remember, there is that one net benefit from higher interest: The federal government adds more stimulus dollars to the economy when it pays more interest.

In Summary:

1. 1. Rising interest rates benefit the nation as a whole, because they force the federal government to add more stimulus dollars to the economy. Higher rates are associated with economic growth.Short term, the stock market reacts negatively to interest rate increases, because traders anticipate it will, and act accordingly. Within a few days, the market recovers, which proves the point.
   2. That said, borrowers are punished and lenders benefit from rising interest rates. If you plan to take out a new mortgage or to buy a car in the future, you will pay more interest. If you plan to put dollars into a bank savings account, a money market, a Treasury Security or a bank CD, you will benefit from an interest rate increase.
   3. To pay a creditor, the federal government sends instructions to the creditor’s bank, instructing the bank to increase the balance in the creditor’s checking account. When the bank does as instructed, dollars are added to the money supply.From a bookkeeping standpoint, an account at the Federal Reserve Bank called Treasury’s General Account simultaneously is debited. Though this account is not part of the nation’s money supply, an obsolete rule disallows it from having an overdraft.

      So, the federal government, which is sovereign over the dollar, is forced to issue T-securities.These securities do not add to the federal government’s money supply (the government has no money supply) or provide the federal government with spending money, but rather they obey the rule by providing a bookkeeping credit to the Treasury’s General Account.

      If the government merely eliminated the rule, the Treasury could continue paying its bills, but there would be no requirement to issue T-securities, and there would be no worries about the so-called federal “debt.”

   4. The federal debt/GDP ratio does not reflect the federal government’s ability to pay its bills. It does not reflect the health of the economy. It does not reflect future tax increases or decreases. It is a meaningless ratio comprised of a multi-year measure (total T-securities) divided by a 1-year measure (GDP).
   5. The unfounded concerns about the federal deficit and debt are promulgated by the very rich, who based on Gap Psychology, wish to convince the rest of America that federal social benefits (Social Security, Medicare, Medicaid, aids to the poor, aids to education, etc.) are unaffordable.

   Rodger Malcolm Mitchell

   Monetary Sovereignty

   Twitter: @rodgermitchell; Search #monetarysovereignty

   Facebook: Rodger Malcolm Mitchell

   MONETARY SOVEREIGNTY

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   The 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