Edwin Hooper<\/a><\/p>\n\nInterest rates are rising as if this will simply compensate investors for the risk of inflation. The reality is that it will increase the economy\u2019s inability to cope with the breakdown that is already in progress.<\/p>\n
How Did the Myth of Interest Rates Rising in Response to Price Inflation Begin?<\/p>\n
The moral rationalization is to protect the purchasing power of creditor claims on debtors, as measured by the purchasing power of debt payments over consumer prices.<\/p>\n
The pretense is that creditors use their interest to buy goods and services. But already in the 18th century, critics of debt financing recognized that bondholders recycle most of their money into new loans. When they do spend part of their interest income into the \u201creal\u201d non-financial economy, it is mainly to buy prestige real estate, primarily in major financial centers, and secondly on luxury goods \u2013 mainly imported, in Italy in the mid-18th century, just as today.<\/p>\n
By the 19th century, creditors sought some excuse to justify their interest charges by depicting these as compensation for the risk that they might have to suffer a loss through loan defaults or by a loss of their purchasing power over goods and services as prices rose \u2013 and more to the point, over the labor that produced these products.<\/p>\n
Austrian economists such as B\u00f6hm-Bawerk went so far as to claim that interest was a payment for the \u201cservice\u201d of abstaining from consuming their income, but using \u201ctime preference\u201d to consume more later. Having to pay interest, thus was depicted as the price of \u201cimpatience.\u201d It was as if wage earners (\u201cconsumers\u201d) had a choice to abstain from running into debt, lacking prudence. This prompted Marx to quip that the Rothschild bankers must be the most abstinent family in Europe. It was as if there was no financial sector of bankers and bondholders acting independently of the economy of production and consumption.<\/p>\n
Raising Interest Rates to Slow Employment and Keep Wages Low<\/p>\n
The more recent 20th-century logic is that of Paul Volcker, when he increased interest rates to over 20% at the end of the Carter administration in 1980. He saw wages rising as a result of the Vietnam War\u2019s \u201cguns and butter\u201d fiscal policy, called military Keynesianism in times when the aim is to increase profits, investment and employment. Volcker, formerly a Chase Manhattan banker, wanted to increase unemployment so as to keep wages from rising further. He succeeded in creating a crash as bank interest rates rose to 20%.<\/p>\n
That obviously is not the aim of today\u2019s rise in interest rates. But it is the effect. And this is just the opposite of compensating for risk. It sharply increases economic risk throughout the economy, not only for industry and employment but for the financial sector. That is what makes today\u2019s high stock market prices so puzzling, a short-term focus on just riding the wave of rumors floated by the Trump administration about the likelihood of peace restoring the happy status quo ante.<\/p>\n
Governments Lower Interest Rates Mainly to Increase Debt-Leveraged Prices for Financial Wealth<\/p>\n
The guiding fiction in the idea that rising interest rates will slow price inflation by reducing investment and employment that banks help the industrial economy by creating credit to lend to companies to expand the economy. But that is not what banks do under finance capitalism. They lend against assets already in place and available to be pledged as collateral, for the purpose of buying more real estate, bonds and stocks. The effect of these loans is to inflate asset prices, not consumer prices.<\/p>\n
Governments and their central banks may pretend to be lowering interest rates to spur the economy, but the basic reason is to re-inflate prices for financial securities and real estate. That\u2019s the main aim of today\u2019s finance capitalism, after all. Its aim of increasing fortunes by creating debt-leveraged asset-price gains has turned economies into a great Ponzi scheme.<\/p>\n
This policy must fail because keeping prices for collateral held by banks and other creditors from falling in price, and thus causing a loss of financialized asset-price gains, requires the economy to take on more and more debt.<\/p>\n
Obama\u2019s Bank Bailout and ZIRP Has Left the U.S. Economy Debt-Leveraged<\/p>\n
The U.S. Federal Reserve\u2019s response to the 2008 junk-mortgage bank crash is informative for how the government may seek to cope with the coming financial crisis. \u00a0Real estate and corporate debt prices were plunging because of defaults on junk mortgages and the web of bad casino bets on financial derivatives. The Obama administration\u2019s response was to inaugurate the Zero Interest-Rate Policy (ZIRP). The Federal Reserve rescued the banks from negative equity by loading the banking system \u2013 and via it, the financial markets \u2013 with low-interest debt leveraging.<\/p>\n
The result was the greatest bond market boom in history \u2013 but not a boom for industry and labor. A K-shaped U.S. economy saw sharply rising wealth for the One Percent, but the industrial economy has continued to suffer its long decline as wages and industrial profits are being spent on the FIRE sector \u2013 Finance, Insurance (including health insurance under the privatized Obamacare) and Real Estate.<\/p>\n
Financially engineering the post-2008 asset-price \u201crecovery\u201d for real estate, stocks and bonds has left the economy so highly debt-leveraged that there is little room for an economic downturn caused by interruptions of OPEC\u2019s oil and gas trade. The oil shortage is indeed raising the commodity price levels, but this is not a result of higher employment or wage levels. It is a result of Trump\u2019s war to maintain control of the world\u2019s oil trade in U.S. hands. Iran has responded by saying that if other nations do not act to stop Trump\u2019s attack, Iran will destroy Arab oil production and the whole world will pay the price of being pushed into a prolonged economic depression. And the world has stood by, as if believing that the United States can conquer Iran as it did Venezuela and somehow restore normal relations under U.S. control and avoid world depression.<\/p>\n
But Trump is said to be thinking of one last great air strike. Whether or not this occurs, it is now obvious that the effect of world oil shortages and the resulting rise in oil prices will force major industries to shut down throughout the world: chemical producers, fertilizer and mining that depend on sulfuric acid, energy users such as aluminum and glass making, plastics needing naphtha, manufacturing, and course household heating and lighting. Their linkages for production will be interrupted at critical points, forcing them to lay off their employees and shut down because they cannot continue to produce and make profits.<\/p>\n
It also means that such companies will not be able to meet their scheduled debt service obligations to their bondholders and bankers, not to speak of stopping their stock buyback programs. That is what happens in a depression.<\/p>\n
The result will be not only price deflation, but a deflation of markets and consumer \u201cdemand\u201d and a wave of debt defaults. That threatens a transfer of collateral and other property from debtors to creditors, whose problems with collecting may nonetheless leave them with negative equity. So we are back in 2009, but without any opportunity to pile on yet more debt to enable economies to \u201cborrow their way out of debts\u201d that have been taken on for the past 27 years.<\/p>\n
Rising Interest Rates are an Untenable Solution to Today\u2019s Imminent Depression<\/p>\n
The big question that must be asked is how long the U.S. economy can sustain long-term interest rates of over 5% for Treasury 30-year bonds, 4\/6%+ for 10-year bonds, and circa 7% for home mortgage loans. Many loans for commercial real estate and also private equity are soon coming due to be rolled over. How can these debts be refinanced at the rates that are looming? And new construction and property sales will be constrained by the inability of new borrowers to pay the higher carrying charges for homes or other properties.<\/p>\n
The government will try to do what it usually does: bail out the financial sector, not the \u201creal\u201d economy, which already is being crucified on a cross of debt. But governments are not moving to protect labor\u2019s wages and living standards, or even their industry\u2019s solvency. Central banks aim to save the financial sector \u2013 that is, financialized wealth that has been inflated by debt-leveraging as prices for real estate, stocks and bonds have been bid up on credit. But the Federal Reserve has already been holding an enormous increase in Treasury bonds to finance Trump\u2019s soaring budget deficit. How will voters respond to the administration favoring the wealthiest One Percent while leaving the rest of the economy to suffer?<\/p>\n
How Should the West React to Such a Problem If We Lived in an Ideal World?<\/p>\n
There is an age-old solution to prevent an economic crisis from resulting from interruptions in harvests, and it is applicable to today\u2019s interruption of the world\u2019s energy trade. But that solution is not one that has become part of Western civilization.<\/p>\n
The laws of Hammurabi, c. 1750 BC, typified how Mesopotamia and other West Asian civilization coped with such interruptions in production from the 3rd through the 1st millennia BC, restoring economic order for thousands of years. Hammurabi ruled that if the Storm God Adad caused a crop failure as a result of a flood or a drought, the debts that cultivators had run up during the crop year and expected to be paid on the public threshing floor at harvest time would be cancelled. (Many such debts were to the palace and its bureaucracy, so this did not create a revolution by angry creditors. Business debts among merchants were left intact \u2013 only grain debts by the disrupted agrarian population were cancelled.)<\/p>\n
If these personal debts had not been cancelled, Babylonia\u2019s agrarian population would have been subject to debt bondage to creditors, and to losing their land tenure rights to what would have become an emerging creditor oligarchy. \u00a0I have described all this in \u2026 And Forgive Them Their Debts\u201d and \u00a0Temples of Enterprise.<\/p>\n
Such debt cancellations in the face of natural disasters enabled the West Asian economies to avoid the emergence of creditor oligarchies. But Western societies have never had such central rulers, \u201cdivine kingship\u201d or Confucian emperors to prevent such oligarchies from gaining control of governments and causing widespread public discontent. As I have described this failure of Western civilization in my Collapse of Antiquity, all government has been by oligarchies (as Aristotle noted), and they invariably fall subject to money-love and wealth addiction that polarizes economies between creditors and debtors, landlords and renters, leading to economic collapse such as that of Rome.<\/p>\n
Prospects for Today\u2019s U.S. and Foreign Economies in the Face of the Oil Crisis<\/p>\n
Today\u2019s financial markets seem to expect the Federal Reserve to follow its usual knee-jerk reaction to rising consumer prices by raising interest rates. As noted above, this is supposed to slow the economy and create a \u201creserve army of the unemployed\u201d to keep wages down by causing economic distress. But the U.S. economy is not in a boom or even thriving. It and other economies are already in distress as a result of the looming oil and energy crisis. In addition to companies scaling back their production and commercial real estate and homeowners face real estate mortgages falling due. Rising interest rates will push the cost of refinancing these mortgages and other debts beyond the ability of debtors to pay out of their falling income.<\/p>\n
The result threatens to be a vast transfer of property from debtors to creditors. The United States and Western Europe, thus may experience something like Asian countries did in their currency crisis of 1997-1998. That would be a bonanza for vulture funds to sweep in and acquire real estate and companies at distress prices.<\/p>\n
Nobody is suggesting a \u201cBabylonian\u201d solution of suspending debt service for economies that are unable to pay on an economy-wide scale. The West\u2019s creditor-oriented legal systems call for a transfer of property ownership as banks and bondholders take over collateral that has been pledged for debt or property that debtors are forced to sell.<\/p>\n
Much of this collateral consists of claims of other companies throughout the economy, so the crisis will engulf the entire social and political system. This is what was threatened back in 2008-2009 when the junk-mortgage and bank-fraud crisis led to a collapse in real estate prices. But the economy\u2019s Ponzi Scheme of increasing wealth by debt leveraging by supplying new credit has reached the limit.<\/p>\n
We can now see that the long upsweep since 1945 that seemed to be a series of self-correcting business cycles has been a failed finance-capitalist detour from industrial capitalism that has no automatic self-correcting market forces. The solution must come from outside the market system. And that is something that neither academic economics nor the public relations ideology of free markets (meaning unregulated and privatized economies, Thatcher-Reagan style) has closed its eyes to. The future will call for thinking about the unthinkable. It requires recognition that debts that can\u2019t be paid won\u2019t be.<\/p>\n","protected":false},"excerpt":{"rendered":"Photo by Edwin Hooper Interest rates are rising as if this will simply compensate investors for the risk…\n","protected":false},"author":2,"featured_media":452085,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[114,184,85,46],"class_list":["post-452084","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-economy","tag-il","tag-israel"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/452084","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/comments?post=452084"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/452084\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media\/452085"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media?parent=452084"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/categories?post=452084"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/tags?post=452084"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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