The Dark Side Six Part 4
Federal Reserve Board, Interest Rates, and Stimulus
Encouraging people to borrow money to buy things helps the short term economy, but harms the long term economy. The degree to which borrowing harms the future economy depends on the interest rate. The higher the interest rate, the more harm is done do future consumption by borrowing to consume today. Let me clarify that. When I talk of consumption I am talking of consuming material things, like cars, houses, and nights out on the town. You could say that when you borrow money you are consuming a loan, and that does show up on the GDP, but the financial industry does not create jobs to the extent that, say, manufacturing or construction does.
So by encouraging people to borrow and consume today, the government is promoting the decrease in consumption by X% in the future, depending on the interest rate. While governments and corporations may be able to borrow at low interest rates, the same cannot be said for credit card debt, especially if you are late with a payment. In a country where 60% of the GDP is comprised by private consumption, a drop of 5% is significant, and many people are paying higher interest rates than that, to pay for things that they consumed in the past.
The largest part of personal indebtedness is home mortgages. The government has been promoting home ownership since the 50s, and the Democrats especially have been encouraging home ownership among the poor and minorities. Well and good. But Jesus taught “Lead us not into temptation”, and the government did indeed tempt many people with home loans they could not afford. The US housing market worked very well as long as interest rates stayed low, housing prices continued to rise, and people kept their jobs. Those conditions obviously did not hold after the ’08 crash.
Let me reiterate my argument: The government uses low interest rates to promote consumption today at the expense of consumption in the future. The government stimulus programs are promoted as encouraging the “main street” economy, when in actuality they are only propping up the Wall Street economy. The Federal Reserve Board’s policies are ultimately aimed at weakening the economies of the rest of the world, especially those of the “petro-thug” nations.
Perhaps it is time to speculate on the interest rate discussions going on in Jackson Hole, Wyoming, as we speak. The Federal Reserve sets the rate at which it will loan money to its member banks. This short term interest rate, along with the Federal Open Market Committee, has long been the primary lever the Fed has used to move the economy. The recent stimulus programs have been the Fed’s successful attempt to lower long term interest rates. The short term interest rate is used, ostensibly, to promote sustainable growth and employment.
The Dark Side feels, however, that low interest rates are used to feed the “irrational exuberance” that creates market bubbles.
When the US sneezes, the world catches cold. Similarly, when the US gets high, the world gets euphoric. The recent lifting of X billions of people out of poverty by neo-liberal, free trade policies is a real, if non-sustainable, phenomena. Real because those people assembling our cell phones can now afford their own cell phones, and non-sustainable because those people can’t vote for the people who make the rules, and the people whose jobs they took, can.
The Federal Reserve Board is comprised of eight of the twelve heads of the Federal Reserve Banks, on a rotating basis, headed by, currently, Janis Yeltsin, Washington’s appointed minister, who can set the agenda for the meetings, but whose vote is only equal to the other’s. Yeltsin will try to convince her Board members to go along with Washington’s position, but majority rules, and if the majority of the members think their bank’s interests would be better served by other policies, so be it.
It is in the US’s interest to keep the rest of the world in a weak and dependent position, and it has largely been successful in this endeavor since wresting world hegemonic power from Great Britain after WW2. Currently, this endeavor has been successful in enticing underdeveloped countries to take out loans now, that they will be unable to repay in the future, thus positioning them in debt peonage, a situation where they are only able to pay interest on a loan, and never repay the principal.
Recalling that the main adversary is Russia, the only country with the capability to annihilate the US, the question before the Fed Board members becomes, not only, will my bank’s portfolio gain or lose by raising the interest rate, but also, how will this affect the struggle against Russia? If, as the Dark Side assumes, the best way to weaken Russia is by keeping the price of oil low, then the meeting in Jackson Hole revolves around how to keep the world economy in a low growth environment. Factoring into this, the individual members of the Fed Board must consider their bank’s exposure to third world assets: is it better to weaken Russia or to induce bankruptcy in the third world, with the objective of picking up assets on the cheap, or to continue their debt peonage?