Originally posted on Quora May 26, 2022
Sources: How the Federal Reserve is Increasing Wealth Inequality , The Fed “saved” the economy but is threatening trillions of dollars worth of middle class retirement,The Phillips Curve is Dead (except in Federal Reserve and CBO models), The Federal Reserve Monopoly Over Money Natural Rate of Interest According to Hutchins Center
Central bank stooges like to tout near zero rates as helping grow the economy and while this is half true, they fail to divulge, either through willful ignorance or belligerent stupidity, that these near zero rates are a double edge sword. On one end it protects the assets of finance capital and the upper echelons of society from ruin every cycle and on the other end it cuts down the savings rate and purchasing power of lower income workers who rely on social security and employees with public pensions. The cheap credit grows the pie but also reduces the size of some slices and raises the tide but also punctures holes in some of the boats. The detrimental effects of cheap central bank credit has been in the purview of Georgists and the larger liberty movement for years but it appears some on the left end of the spectrum, who are typically uncritical of any Fed policies, even though they are the lynch pin of Wall Street, have also begun to take notice. One such outlet discovered that while near zero interest is a boon to stock and real estate prices for one class of people it comes at the expense of lower savings rates and treasury security yields for another class.
Higher stock prices are great for people (including me) who own a lot of stocks, but those people are primarily the top 10% of the country, in terms of wealth. According to Fed statistics, more than half of stocks — 52% — are owned by the wealthiest 1% of Americans, and 88% are owned by the top 10%.
“High-wealth households do much better in a low-rate environment than lower-wealth households do,” Mark Zandi, chief economist of Moody’s Analytics, said. “The low-interest environment increases inequality by increasing the wealth of people who are well off.” Zandi noted, however, that less well-off people don’t lose money because of the low rates; they simply don’t do as well as wealthier people.
The last sentence is yet another half-truth. While they don’t lose money nominally, they do lose the real value of their money in the form of purchasing power. Even in good years inflation hovers around 2-3% much higher than the measly interest on any bank account. And this doesn’t even take into consideration the upward pressure a near zero rate puts on housing prices which is the largest expense incurred by renters. As I’ve noted in previous posts, rents and house prices have outpaced income growth in the bottom quintile for the past two decades and even median income a decade before the pandemic, making it harder for renters to continue renting and even less feasible to purchase a house in the future.
Post pandemic and the Federal Reserve reversion to near zero interest rates, rental inflation shot up to 14% nationwide and as much as 35-40% in cities like Austin and New York. Home price sales shot up 17% nationwide making the prospects of homeownership even further out of reach for renters. To say that “less well off people don’t lose money because of lower rates” is only true if you measure the nominal value of the money instead of the real value of the money. Near zero rates have also decimated the social security trust fund that lower income workers rely on for retirement.
For starters, near-zero rates are making the financial problems of the already-stressed Social Security system worse than they would otherwise be by sharply reducing the interest that Social Security can earn on its $2.9 trillion trust fund. That trust fund consists entirely of Treasury securities and is legally barred from owning stocks. That means that the fund’s interest yield is falling and it’s not benefiting from the 50% rise in stock prices since the market bottomed on March 23.
If you are a renter or relying on social security for retirement you are playing a losing game. This is the closest and most accurate approximation to the phrase “the markets are rigged.” They are rigged in favor of players who can afford higher risk exposure and lower time preference choices. Few on the bottom end of the income distribution can afford to gamble most of their disposable income on the stock market. With less disposable income all or most of what is not spent on necessities, the largest one being rent, needs to be set aside for emergencies (i.e. an HSA) or future expenses (e.g. car repairs, insurance premiums, new appliances etc). Putting your money in equity whether it be in a brokerage account, Roth IRA, 401K, or mutual fund means setting aside money that will not be immediately accessible when you need it. A savings account or HSA isn’t seen as an investment but a life line.
There is a different set of tradeoffs for rate hikes: more wealth is transferred from debtors to creditors (i.e. from homeowners to mortgage lenders) more borrowers are unable to pay their mortgages leading to a higher foreclosure rates, borrowers in general pay more for the same goods in credit card, personal loan and auto loan debt and more people are laid off from their jobs losing the only source of income they have. The Fed hikes rates under the specious assumptions that all inflation must be demand-pull inflation from wage growth that can be resolved by raising the cost of borrowing and the Phillips Curve model that assumes that lower unemployment and higher wages eventually causes higher inflation and vice versa merely from correlational data from one country during a 25 year period, that has neither stood the test of time or even been replicable across countries (the following is pre-pandemic data).
“Standard models of the economy are built on a simple relationship: When unemployment goes down, inflation eventually goes up. That relationship, dubbed the Phillips Curve, has looked sickly for years. In Japan, it may be dead.” Unemployment is 2.5% in Japan, yet inflation is 1.1% and only 0.4% if we leave out energy and food (“core” inflation). For that matter, the unemployment rate is 2.0% in Singapore yet inflation is 0.2%.
Saying we need more jobless people to keep consumer prices at a reasonable level makes as much sense as saying we need more homeless people to keep rents at a reasonable level. The presumption that we would need a labor surplus (or a tenant surplus) might serve the interest of finance capital (and landlords), which all federal reserve policies do, but it does not always pan out in reality. When we have cost-push inflation, as we have now, for goods and services with an inelastic demand the Fed makes no distinction, does not change course, and uses the same blunt instrument it uses for all inflation regardless of cause or tradeoffs. People are not eating significantly more food, buying more clothes and shoes, buying more gas to get to work, or even borrowing more money for startups. The inflation is incurred on the supply-side. Raising the cost of borrowing does nothing to solve this problem and if anything makes it worse; more people delay homeownership and remain renters, more people lose their homes, more people delay starting businesses or expanding existing ones, and more people are put out of the labor force. Once again the most harm is done at the bottom of the income distribution to those without equity.
The root of the problem is not whether the Federal Reserve sets interest rates higher or lower but the money monopoly itself that denies large segments of the population access to cheap credit. There can be no natural rate of interest if you have to pay a monopoly rate for credit. Just like the “natural rate of unemployment” postulated by the Phillips Curve, the “natural rate of interest” under a monopoly system is only theoretical because there is only ever a monopoly rate of interest, just as there is only ever a monopoly price of land under a system of privatized land rent, and a monopoly price for patented and copyrighted products. It rests solely on the presumption that the existing statutory relationship between finance capital and productive capital could exist in no other way, that reserve banks will always be the middle men, and is nothing more than an ad hoc justification for existing institutions. Perhaps this is why the natural rate of interest is not “observable” and has to be estimated through contradictory models that change with the wind.
What is the rate? No one knows, but there are estimates. On the higher side, the Federal Open Market Committee thinks over the “long run” (meaning “five or six years”) it is 1.5%. This number can be found by taking its median long-run projection for the federal funds rate, 3.5%, and subtracting its long-run projection for inflation, 2%. Others believe a “reasonable range” is “between 1 and 2%.” (See Hamilton’s paper.)On the lower side, Mr. Williams estimated in a recent paper that at the end of 2014 it was -0.2% (but since he’s a voting member of the FOMC, and the lowest real long-run estimate was 1%, he must not fully trust the prediction). But others also suspect it might be below zero: In 2014, three Chicago Fed economists estimated it had been “persistently negative since 2008.”
They don’t know but they all believe it’s declining. By how much? No one knows because they can’t agree on what it is or even whether it’s a positive or negative rate. It is the same nonsense as the natural rate of unemployment that assumes we need surplus labor (basically reverse Marxism) to keep consumer prices reasonable. The federal fund rate directly affects only the rate at which banks lend to each other. Everyone else is charged a premium and the trickle down effect is not evenly distributed. For instance, near zero fed rates rarely bring down credit card APR but rate hikes do raise it.
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