The Fed’s Interest Rate and QE Policies Have Allowed Billionaires and Corporations to Buy America’s Assets Out from Under the People


… All on money, loaned for free by FED, that the American People have to pay the interest on. 

Liquidating Civilization, Report 22 Apr 2018

In a normal world, borrowers cannot run a loss-making enterprise indefinitely. Though even in positive-rates America, they can get away with it for a long time if the Fed creates a permissive credit environment.

However, Fed or no Fed, losses are written on the financial statements. A business that destroys investor capital at -1% per year will run out of cash, sooner or later. This is in a normal world. What if the world is not normal?

Let’s consider that. Losing Corp. loses money at -1% but borrows at -2%. Earnings before interest is negative. But after interest, “earnings” is positive. Unlike the former case where the company reports loses while other companies are presumably reporting profits, and thus the money-losing company will eventually repel investors, in this case it is sustainable. At least so long as the interest rate is negative. Which it will be (and falling) for all the reasons we have been writing for years.

Liquidating Civilization

Of course, it’s not sustainable. It will end, but the central banking regime has made it much more difficult to liquidate losing businesses (while ensuring more and more businesses will lose). Large scale business liquidation can only occur when it is no longer possible to slowly liquidate civilization.

Let’s defend that statement. The interest rate is the single most important price in the economy, because every other price and every investment and every enterprise depends on it. And the central banks have created a system which has driven it down to zero and beyond.

The interest rate is the expression, in the market, of a universal in the human condition. Time itself (we will revisit this idea in a future essay).

When interest sinks below zero, it means that the return to be earned on capital is negative. It means all savers are doomed to slowly lose their capital. It means any other better opportunities have, for one reason or another, gone away. No one would lend at -2% if he could get +3% obviously. So the market being moribund at -2% means the marginal enterprise sees no better opportunity. They are willing to borrow only if the rate is that or lower.

As an aside, this is a good way to think of the dynamics of a falling interest rate. There is little demand for credit, other than on a downtick in interest rates.

By the time it gets to the terminal phase, where businesses are borrowing at -2%, the marginal business is not able to bid higher than that. It does not want credit, except when the price is -2%. A business will always seek to borrow at lower than its return on capital (or else there’s no point). A bid of -2% means the business wants credit to finance wealth-destroying activities.

There is no mechanism to deprive one particular wealth-destroying enterprise of capital, when large numbers of them are losing. There is not one bad company showing losses on its financial statements, slowly running out of cash. There is a whole economy full of them—showing profits! If something is profitable, businesses will scale it up until it no longer is.

In a free market, only wealth-creation is profitable. But in this terminal stage of the unfree market based on the forced feeding of credit, borrowing at -2% and destroying capital at -1% is profitable. This trade will be scaled up.

Perverse Incentive → Perverse Outcome

Inevitably, people will blame free markets, business, and the profit motive itself. They will not question the perverse outcome that comes from the perverse incentive of a falling interest rate and the heat death of the economic universe. So the for-profit business will take the blame that should go to the Fed and the legal tender laws and the rest of the whole edifice of our monetary regime.

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The Federal Reserve is ruining us

Federal Reserve Logo

The Worst Threat We Face Is Right Here At Home

Modern-Day Soviet Crop Reports

In the former Soviet Union, the communist method of assuring economic progress was to set targets for production. Famous among them were the crop reports.

In these, year after year, the various regional oblast (province) authorities would declare having met or exceeded the crop targets, despite rarely ever truly doing so.

These crop reports were so famously unreliable that the Kremlin leadership eventually took to obtaining their information from US satellite reconnaissance data rather than their own internal reporting from local Communist Party bosses.

Basing next year’s crop planting decisions on these reports often led to famines, and sometimes even mass starvation of entire regions.

Poor data = Bad decisions.

The Soviet crop reports are now a famous example of an unreliable measure that led to disastrous consequences. Because of the false reporting, poor decisions were made. Eventually it became clear to even the Soviets that attempting to centrally micro-manage a major economy is an act of folly.

Too much of this and too little of that were produced.  Cement, steel, and auto quotas harmed rather than helped for obvious reasons; poor information flows assured that production decisions were late or flawed or both. All this contributed dearly to the Soviet economy’s collapse.

The lessons here are instructive and simple:

  1. centralized management of complex systems doesn’t work, and
  2. bad data leads to bad outcomes

Today’s stock and bond markets are no different than the Soviet crop reports of old.  They mainly represent what a small committee of central planners believe are the right numbers to achieve very broad macro-economic goals.

Enormous damage has already been done by the interventions and distortions resulting from the pursuit of the delusional aims of todays central planners (with the world’s central banking cartel being the most culpable).

But it’s poised to get a lot worse from here.

When it comes to repaying the current global debt levels of ~310 % of GDP, we can confidently predict that such a debt load can never be repaid. They can only try to roll it over as long as they can — which can’t go on much longer without real consequence. Mounting losses are certain at this point.

When it comes to underfunded promises and entitlement programs, such as pensions and social security (clocking in at nearly 800% of GDP!), there’s really only one all-important question that matter at this point: Who’s going to eat the losses?

In Part 2: It’s Even Worse Than You Think, we reveal the much further extent of the racket being run against the public by the world central banking cartel, and how it’s efforts to continue this racket have sentenced us all to another massive financial/economic crisis — one that is both now inevitable, necessary, and overdue.

By preventing that which should happen, the central banks have set the stage for an enormously dangerous and disruptive market crash.  The kind that forces markets to close for days and weeks on end.  The kind that leads to major banking crises punctuated by ‘holidays’ where depositors can not access their money.  The kind where disorder and social unrest becomes a real risk.

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Our National Debt And Government Spending Are A Moral Abomination

Federal Debt

Congress has returned to doing what it loves most: spending money we don’t have. Increased spending in the latest bipartisan budget deal, along with the recent Republican tax cuts, will vastly increase the deficit.

Principled conservatives objected, but were ignored in the scramble to give the American people what they want: more government spending without having to pay for it. Both parties are happy to deliver. With some worthy exceptions, Republicans who had bitterly criticized the “Obama deficits” are now eagerly embracing enormous Trump deficits.

This is sinful, but few people think of government deficits in such terms. This is not due to any reticence about political moralizing per se. Much of our political discourse now consists of dismissing our opponents as moral monsters and declaring “I’m better than you.” Why, in this atmosphere, is deficit spending one of the few issues about which more moralizing might be in order?

There seem to be two main factors behind our disinclination to describe persistent deficit spending—and the massive national debt it produces—as a moral wrong. The first is that the national debt doesn’t seem real to us; it is just numbers somewhere in the ether. Even people who consistently oppose reckless deficit spending tend to treat it abstractly. The second is that both parties are thoroughly guilty of contributing to the problem, so partisans have a strong incentive to be indulgent on the subject.

The National Debt Steals People’s Futures

Nonetheless, this is a moral problem. Our national debt steals from other people’s futures in a way that mere personal debt does not. For instance, if I borrow money, whether for a house, a car, an education, or a shiny new cell phone, I am the one who will have to pay it back or suffer the consequences (harassment by collection agencies, repossession, bankruptcy, and so on). The debt is mine, and so are the consequences if I borrow more than I can repay.

But while the money we’re borrowing as a nation will have to be paid back, those doing so will not be the people who get it. Federal deficit spending is not like going into personal debt. It is like grandma going on a binge with her grandchildren’s credit cards. It is parents signing away their children’s future for some government handouts now.

It is wrong to place our children and grandchildren under enormous debt. It is a sin against them. But we don’t think of deficit spending that way. Parents and grandparents who otherwise work hard to help their children and grandchildren succeed have no compunction about burdening them with endless budget deficits resulting in a crushing national debt.

This is not only because the deficit and debt seem remote in a way that personal credit card bills are not, but also because many people are unaware that the sources of the deficit are some of the federal government’s most popular programs: Social SecurityMedicare and Medicaid, and military spending. Few people want to cut these, and the next largest expense is paying the interest on our nation’s existing debt, which can’t be cut without causing a global financial crisis.

There is no easy solution, though voters enjoy being lied to and told that one exists (if only the other party weren’t obstructing it). As ridiculous as some federally funded programs can be (e.g., Harry Reid’s cowboy poetry), they aren’t the real problem. The deficit cannot be fixed by cutting foreign aid or the National Endowment for the Arts, or by taxing the rich just a bit more. It cannot be fixed by addressing “waste, fraud and abuse.” The real money is spent on the military and middle-class welfare programs.

Yes, Your Favorite Government Programs Are Welfare

And they are welfare programs, even if that appellation makes many beneficiaries uncomfortable. Social Security is a not a retirement account the government maintains for you. It is a transfer program, in which today’s workers are taxed to pay today’s retirees and the disabled. The amount someone pays in is not what he or she will get out, and many people receive far more in benefits than they paid in.

Likewise, Medicare is not a health savings account administered by the government. It is an incredibly expensive welfare program in which those currently working pay for the health care of the elderly and disabled, with lifetime costs for beneficiaries usually far in excess of what they paid into the program.

That these are welfare programs does not mean they should be eliminated. Wealthy societies with strong economies can afford some welfare spending, or even a lot of it. However, honesty about what these programs are and what they are for is necessary if we are to keep from being bankrupted by them. We must face the reality that the typical welfare queen isn’t a black mother in the inner city, but a middle-class white retiree.

Refusing to Pay for This Welfare Is Immoral

If we want generous middle-class benefits, we will need to drastically cut defense spending and raise taxes, including on the middle class. If we are not willing to do that, then we need to reform our entitlement programs to be sustainable. Either way, the sooner we address these problems, the less painful the adjustment will be. The more indebted and dependent our nation is, the more it will hurt when we run out of easy credit.

But right now, politicians (who are well aware of the problems of endless deficits) are terrified of voters punishing them for any changes. Both parties have campaigned on protecting entitlements, and both have attacked the other for attempting reform. Young voters, who will lose the most on our current trajectory, are often disengaged and besotted with adolescent socialist fantasies.

Meanwhile, retirees and near-retirees vote. They aren’t keen on politicians who raise taxes or cut military spending, and they will annihilate any politician who threatens their government checks and health care. The youth are checked out or feeling the Bern, while their elders are selling them down the river.

The electoral math suggests that there will be no reform or restraint except what will eventually be forced on us by the pitiless math of accounting and economics. That will be a painful reckoning. The consequences will be severe, and those who oppose putting our national finances in order are sinning against their children and grandchildren.

Nathanael Blake has a PhD in political theory. He lives in Missouri.


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