Do Interest Rate Hikes Really Fight Inflation?

Short answer:  In a word, NO.

Long answer:  It's a very nuanced and complicated issue, but in practice, hiking interest rates generally does more harm than good, and at best is really not very effective in fighting inflation. 

Interest rate hikes, far from being a "razor-sharp, double-edged sword" (as we at the TSAP used to say) in theory, they are in practice just as blunt of an instrument as tax hikes are.  And they only "work" insofar as they cause a recession, as history has shown.  When the FERAL Reserve raises interest rates, it is "pushing on a a string" when they raise them insufficiently to cause a recession, and "blunt force trauma" to the economy when they raise them enough to do so.  And when they cut rates, it is even more so like "pushing on a string", as the damage is usually already done by that point, and of course they cannot cross the "zero lower-bound" into negative rates without inherently turning the world of finance upside-down.  There seems to be no "Goldilocks zone" for interest rate policy during times of high inflation, and the "therapeutic window" is generally closed.

Knowledge says that choking the economy until it goes limp and then choking it some more technically reduces inflation by killing demand for goods and services.  But wisdom says that one could hardly call that a success.

Not only are interest rate hikes inherently recessionary, they can also paradoxically increase one of the two types of inflation, "cost-push inflation", even as they tamp down the other type, "demand-pull inflation."  Both types are two sides of the same coin, so it can easily result in (or exacerbate) chronic stagflation, for which the only "cure" is to hike the rates so extremely high to cause a deep recession or depression, followed by cutting rates very quickly, at the cost of massive collateral damage.  A "cure" that is worse than the disease.

And the fallout falls not on the rich, who are largely insulated from the consequences, but overwhelmingly on the poor and working class, and also the middle class as well.

Cutting the money supply, whether fiscally via austerity or monetarily via quantitative tightening, is also similarly recessionary and damaging as well.  Both forms of tightening, along with interest rate hikes, are at best "break glass in case of emergency" measures that should almost never be used, period.

In other words, if you "burn the village to save it", the village will eventually return the favor.  You reap what you sow.  That's literally how karma works.

Even Rodger Malcolm Mitchell himself has recently turned against the idea of interest rate hikes, a policy he once strongly supported.  That really says something indeed.  Ellen Brown would agree as well.

So what works instead?  According to Mitchell, the root cause of ALL inflations is shortages.  Whether it's oil, gas, energy in general, food, labor, or otherwise, shortages are the common denominator.  To cure inflation, we must cure the shortages.  Now that is often a lot easier said than done, but governments who issue their own currency can help resolve shortages by fiscally incentivizing more production of such scarce goods and services.  And, of course, to also refrain from creating shortages in the first place with things like price controls or other artificial restrictions by fiat that are known to backfire. 

Oil, gas, or energy shortage?  Incentivize more domestic oil/gas production in the short term, followed by renewable energy production in the medium to long term as well.  Buy oil/gas or energy at at premium and resell it or give it away at a loss.  Food shortage?  Buy food at a premium and resell it or give it away at a loss.  Computer chip shortage?  Incentivize domestic chip factories.  Labor shortage?  Implement a "reverse payroll tax" like the EITC but simpler and more straightforward, to boost the paychecks of workers without increasing costs for employers.  Or the government can hire the most in-demand workers directly at a premium.  And consider replacing all or some means-tested social welfare programs with an unconditional Universal Basic Income (UBI) that does not perversely penalize people for working.  And so on.  That's the power of creating one's own currency via Monetary Sovereignty. 

QED.  Case closed, at least until we find even more compelling evidence otherwise. Therefore, the TSAP's new position in interest rates shall supersede everything we have said in the past about the topic.

UPDATE:  So what is the ideal interest rate then?  Should we do what MMT advocates, and just park it at zero and leave it there? There is a good case to be made for that, and the answer probably depends on a number of factors.  But negative interest rates are really not a wise idea for a national currency (too negative and people just hoard cash under the mattress, while not negative enough is really no better than zero).  For complementary and alternative local currencies, negative interest (aka demurrage) can perhaps make sense, like the Austrian town of Worgl famously did during the Great Depression, but the benefits of such likely do not scale up very well.  Thus for national currencies, zero is the practical lower bound.  And if zero interest (i.e. being able to borrow money for free) is still not stimulative enough, then do "QE for the People" by printing more money and giving it directly to everyone, rather than the banks in "regular" QE.  Problem solved. 

James Gailbraith makes a great case for low interest rates overall.

Thus, like MMT, the natural interest rate should be assumed to be zero by default, but unlike MMT, we should still not tie our hands and take higher rates off the table completely as a "break glass in case of emergency" measure.  Nor should Treasury bond sales be completely discontinued either, as those help stabilize the financial system in times of instability.

But what about speculative bubbles?  Don't low interest rates encourage those?  Yes to some extent, but only if Wall Street is deregulated like the Wild West (like now).  Therefore, better regulation of the big banks and shadow banking system, and a financial transactions tax, are a better idea to rein in reckless speculation than high interest rates. 

TL;DR version:  In a nutshell, raising interest rates has a tendency to backfire and generally does more harm than good, once all the jargon and accoutrements are stripped away. Occam's Razor would say that deliberately making everything effectively more expensive across the board (by making money itself harder and costlier to get) to engineer a recession is a terrible way to fight inflation, and can only encourage a perpetual quagmire of stagflation.

What about the Canadian experience in the 1980s?  Well, their inflation and unemployment were even worse than the USA despite (or more likely because) they kept their interest rates higher for longer.  And that disparity persisted well into the 1990s, until they devalued their overvalued currency, and then cut interest rates, which seemed to solve the problem.

"Too Big To Fail" = Too Big To EXIST

Once again, the issue of "too big to fail" is in the foreground, as we have obviously learned NOTHING from the last financial crisis.  If there is ANY lesson that we must NEVER forget, it is this: "too big to fail (or jail)" is really too big to EXIST, period.  And here is what we absolutely MUST do going forward:  give all banks and corporations large enough to have "systemic risk" (that is, where them failing would literally bring the whole economy down) a choice between the following menu of options:

1. Pay a prohibitive 90% marginal tax rate on all profits beyond the first billion, or,
2. Break up into smaller, unaffiliated banks or companies, similar to what anti-trust laws require for monopolies, or,
3. Full nationalization by the federal government, and (if already failed or failing) replacing the entire board of directors.

That's it.  That's the ONLY real solution. 

Of course, we also need to bring back the Glass-Steagall Act and pass a financial transactions tax and repeal the safe harbor provision of bankruptcy law and regulate derivatives better and stuff like that.

So what are we waiting for?

What Will Really Cause The Next Big Crash?

There is a recent article by Matt Taibbi in both Rolling Stone and Common Dreams that predicts a looming economic disaster due to three colliding problems.  And those three problems are as follows:  1) FERAL Reserve monetary tightening, both in terms of raising interest rates as well as the more subtle but significant Quantitative Tightening  (QT), 2) Trump's tax cuts depending on unrealistically high economic growth to "pay for themselves", and 3) Trump's tariffs and the resulting trade war.  And the collision of all three together will not end well, according to Taibbi, and he is probably right for the most part.

But even these are mere sideshows compared to the very biggest underlying root cause of the next looming crash, even if one or more of these problems are in fact the proverbial spark that sets off the financial powder keg.   So what is this underlying powder keg, exactly?  Well, it is the mother of all stock market bubbles, artificially inflated by corporations buying back their own stock to manipulate share prices.  And famous economist Ted Bauman predicts that when it finally bursts, any day now in fact, the market will quickly plummet by 70% or more, causing a crisis that makes 2008 and perhaps even 1929 look like a walk in the park by comparison.

So how did we get here in the first place?  The story begins in the 1920s, when corporate stock buybacks were all the rage, and in fact caused the 1929 Wall Street crash.  The Great Depression soon followed.  In 1934, this highly manipulative practice was rightly outlawed, and the ban remained in effect for nearly half a century until the Reagan administration lifted this ban in 1982 as part of Reagan's deregulation platform.  And since 2010, stock buybacks have accelerated dramatically, artificially inflating the stock market numbers and lulling hapless investors into a false sense of security.  And the recent Republican tax cuts have only accelerated this trend even further (since corporations now have even more money with which to buy back their stocks).

And what goes up, must come down, and the bigger they are, the harder they fall.

Don't say you weren't warned.  On the bright side though, if the crash occurs before the November 6 election, it will essentially guarantee that the predicted Blue Wave will be a Blue Tsunami, washing away the current vile Red Tide of Trump and his sycophantic Republican lackeys, no matter how much GOP cheating occurs (and surely there will be plenty).

How to Prepare for the Next Big Crash (Part Deux)

As we have noted before, things are really not looking good for the global economy this year.  Whether we actually experience another financial crisis on the order of 2008 or even 1929 (or worse) is a matter of debate, but the time to prepare for such a scenario is yesterday.  At the very least, another recession is inevitable at this point by 2019 at the very latest, since no economic expansion has lasted much more than eight years straight in this country (with the notable exception of 1991-2001 that lasted exactly ten years).  Granted, the expansion from July 2009 to the present mostly benefited the rich, and until around 2014 practically entirely benefited the rich, but it was still technically an expansion of the economy even if the growth was largely uneconomic in practice.  And expansions can only go on so long before a contraction (i.e. recession or depression) inevitably occurs--it's just a fundamental truth of the business cycle.

One thing is for sure--things are very different this time around at least in terms of monetary policy.  At least in 2008, interest rates were well above-zero, and could be cut to stimulate the economy (or, more accurately, stop or slow down the hemorrhaging).  When that proved to be futile, then the Feral Reserve and many of the world's other major central banks resorted to "quantitative easing" (i.e. creating money out of thin air and giving it to the banks directly).  In late 2014, the USA tapered off and ended its QE policy, and in December 2015 ended its zero interest-rate policy by raising the Fed Funds Rate to 0.25-0.50%.  Since then, the FERAL Reserve has raised rates five more times, most recently on March 21, 2018 to 1.50-1.75%, and many more hikes are on their way.  And combined with Trump's new trade war against China, that may have been enough to finally lance the massive bubble--make that the festering BOIL--that the stock market has been in for years now.  And since they now have a little bit of room to cut it--if they don't wait too long to do so--they probably seriously think that they can somehow engineer a soft landing if (and that's a VERY big "if") that is even possible at this point.  But not much room, really.

But many of the central banks of the world are still starting from zero or close to zero--and some banks including the European Central Bank and the Bank of Japan have even resorted to negative interest rates (!) by 2016.  That means they are effectively charging depositors for the "privilege" of depositing money, and effectively paying borrowers to borrow money, which basically turns the world of finance upside-down.  Such negative rate territory is uncharted waters, since until a few years ago no country has ever dared to do such a thing.  And there is currently no evidence to suggest that such a move will be beneficial in the long run, and may in fact turn out to do more harm than good overall.

So monetary policy basically needs a new set of tools and a new game plan to deal with the next crisis, whenever it occurs.  The Feral Reserve and the other central banks of the world are basically still using an outdated playbook.  In the near-term, two things need to change yesterday.  First of all, they need to abandon interest-rate targets altogether for the time being, and instead focus on targeting the growth of the overall economy.  Like Paul Volcker did in 1979-1982, but done in reverse since the "inflation dragon" is not the problem this time (unless the Trump tariffs really begin to bite). Secondly, implement Quantitiative Easing for We the People in general (as opposed to the banks, which only benefits the ultra-rich) by injecting newly-created money into everyone's bank accounts.  Granted, the latter measure would probably require an Act of Congress to allow it to occur legally, but as the Feral Reserve was just two years ago seriously debating the legality of negative interest rates, I'm sure they could find some sort of a loophole to allow it in an emergency such as a massive financial crisis.  And of course fiscal stimulus would likely be necessary as well, in additional to much needed reforms to regulate Wall Street and the big banks (a law that rhymes with "brass seagull" comes to mind, as well as a financial transactions tax and better regulation of the shadow banking system), but those two changes to monetary policy would go a long way towards preventing the next recession/crisis from turning into another 2008 or 1929 or even worse.  And the silly idea of negative interest rates really needs to be abandoned as well.

More fundamentally, of course, we need to nationalize the FERAL Reserve to make it a truly public national bank that creates money interest-free, and take the power back from the big banks.  Ellen Brown has written books about that very subject.  In the meantime, though, the aforementioned recommendations would still work in the near term.

But let's be brutally honest here.  What we are really witnessing these days is the slow and painful death of a woefully obsolete system, one that has been kept on life support for many years now.  And eventually we will have to pull the plug on it, sooner or later.  It's just a matter of time.

One Weird Trick, Part Deux

It just so happens that the very next day after we posted our "One Weird Trick to Rescue Economy" article, the highly progressive former Democratic Congressman Dennis Kuchinich posted an article of his own at The Nation.  Titled "Our Political Economy Is Designed to Create Poverty and Inequality", the article discusses how the economy is currently rigged in favor of the top 1% (especially the top 0.01%) at the expense of the ever-growing poor and ever-shrinking middle class.  This rigging is done through the tax code, obviously, but also through more subtle machinations such as the privatization racket (where formerly public services and utilities are privatized, at the expense of the people and for the benefit of the rich) which also includes our monetary system and the privately-owned FERAL Reserve that has controlled it for over a century now.

And most notably, he discusses a bill that he himself sponsored in 2011-2012 called the NEED Act, which would have ended this monetary racket via an independent Treasury (much like Ellen Brown's public banking idea) and the abolished the scam known as fractional-reserve banking.   The newly-created greenbacks would then be used to create full employment via funding much-needed improvements in infrastructure as well as education, healthcare, and other government spending, which would have been a great stimulus to the economy.   The bill would also restore the federal usury cap to an even lower 8% (it was 12% before it was removed in 1978) as well.  It even had the potential to also create a citizen's dividend (aka a Universal Basic Income), provide universal healthcare, shore up Social Security, and solve so many other problems at once.  Overall, an excellent bill.  But of course, the cowardly and venal Congress unfortunately did not pass it.

In case you were worried whether such an idea would create hyperinflation, allow us to put that fear to rest.  Currently, the private banks create new money out of thin air all the time, every time they make a loan.  The FERAL Reserve does this too, most notably the secret $16 trillion (which eventually became more like $29 trillion) bailout of the banks just a few years ago.  So why not have this process be publicly controlled and used for the benefit of We the People rather than the oligarchs?

As Ellen Brown notes, the Weimar hyperinflation in Germany from 1921-1924 occurred while the money was being created by the private banks.  Germany had been punished with crippling debt by the Allies in the aftermath of WWI, and they needed to create a lot of money to pay it.  The biggest problem, though, were the speculators who shorted their currency (betting that it would go down in value), which became a self-fulfilling prophecy. And the banks just kept on printing more and more marks to satisfy the speculators' demands, creating a vicious cycle of runaway hyperinflation.  The madness only stopped once the government got a handle on it by finally taking back control of the money supply in 1924, which was followed by a few years of relative prosperity before the deflationary Great Depression began in 1929.  And Brown also notes, as we noted in our previous article, that Germany got out of the Depression by using the "one weird trick" themselves (too bad they didn't do it much sooner, that is, before you-know-who took over in 1933).

(And just in case anyone predictably tries to play the "Jew card" after reading this, keep in mind that most oligarchs/banksters are actually WASPs rather than Jews, and have been for quite a while now.  Even the Vatican has their own bank now.  And the TSAP does not condone anti-Semitism of any kind.)

So what are we waiting for?  Let's finally put an end to artificial scarcity and artificially-created unemployment for good. Yesterday.

One Weird Trick to Rescue Economy, Defeat Oligarchy, and Pre-empt Fascism--Banksters HATE This!

As the classic clickbait-y title implies,what if there was a way to accomplish such a thing at little to no cost, and would also result in lower taxes for the masses as well? What if that option has always existed, but knowledge of it has been suppressed by the elites for decades out of fear of losing their power?

Well, it's actually true, believe it or not.  It's so simple that people tend to overlook it, and it's called public banking.  To wit, the government would print/create its own money interest-free, independently of the banks.  And thus the FERAL Reserve (which is about as "federal" as Federal Express, given how it is privately owned by the big banks) would become truly federal for once, with banks serving We the People, not the other way around.  National debt would become a non-problem overnight.  (This idea can also be implemented at the state and local levels as well.)  Of course, the banksters would absolutely HATE that.  For example, both JFK and Lincoln tried to do such a thing in fact, and we all know what eventually happened to them.  But the fact remains that We the People, through our elected representatives in Congress, nonetheless have to power to do exactly that.  We essentially gave the banksters their power, and we can also take it away--were it not for their venal and cowardly puppets in Congress today, that is.

Ellen Brown, author of Web of Debt (2007) and The Public Bank Solution (2013), has a lot to say about such an idea.   She brilliantly illustrates just how important the democratization of money is to a free society, and the history of just how much the bankster oligarchy has been ripping us all off for centuries.  For example, did you know that nearly HALF of the taxes we pay essentially go towards servicing the massive government debt to the banksters?  Did you know that nearly HALF of the price of practically everything we buy is a result of cumulative compound interest and/or hidden taxes embedded within such prices?  Did you know that infrastructure costs can also be cut in HALF simply by financing them with public banking?  And did you know that private banks actually create money out of thin air via a perfectly legal and centuries-old racket known as "fractional reserve banking"?  And that interest charged, not the expansion of the money supply, is the real cause of nearly all of the "inflation" that we see?  And for decades now, wages have not only lagged behind productivity gains, but haven't even kept up with such inflation?  Meanwhile the top 1%, and especially top 0.01%, have made out like bandits at the expense of the bottom 99%, with resulting inequality (which hurts the economy) soaring to levels not seen since the 1920s or even the Gilded Age.  If that doesn't make you feel RIPPED OFF, check your pulse 'cause you might be dead!

So what does all of this have to do with fascism?  Well, it appears that a certain little painter from Austria decided to exploit a rather similar situation in 1930s Germany after taking over.  In fact, rescuing the ailing economy, especially reducing or abolishing unemployment, was one of Hitler's biggest campaign promises.  And he did in fact succeed in doing so, and did so better than FDR despite Germany starting out in much worse shape than the United States was in 1933.  So how did the Nazis manage to pull it off?  By thinking outside the box and having their government essentially create their own money independently of the banks. Their country was literally bankrupt from the aftermath of losing WWI as well as being hit particularly hard by the Great Depression, but by creating their own money and spending it to "prime the pump", they were able to transcend their economic woes, and were thus able to restore full employment within a few short years.  In fact, their unemployment rate dropped by HALF within a year!  Contrast this with Austria, whose unemployment rate remained stubbornly high and barely even budged from 1932-1937, only dropping significantly in 1938 after Hitler annexed their country as part of the Third Reich.  Prior to that, the Austro-fascist regime was essentially following the outdated Austrian School austerity policies that Ludwig von Mises himself would have likely approved of.  The point of this discussion is NOT to praise Hitler or the Nazis in any way, but rather to show what opportunists they were and how to prevent such an evil authoritarian regime from ever rising again--if only the (erstwhile) free world had the foresight to get their economic policies right in the first place.  Because then, there would be essentially no legitimate grievances large enough for such a regime to exploit.

Of course, we would be remiss if we didn't also note that Hitler's "economic miracle" came with a serious dark side as well, even before the Holocaust began in earnest.  At least part of the drop in unemployment was the result of 1) removing Jews from the workforce after revoking their citizenship, replacing them with ethnic Germans, 2) removing women from the workforce (i.e. by firing many of them and also paying mothers to stay home), replacing them with men, and no longer counting women in the statistics, 3) bringing back the draft, and 4) spending ludicrous amounts of money on the military, financed by debt.  But since none of these things occurred until 1935 or even later, one could safely conclude that at least the first two years of the "economic miracle" can be easily traced to the pump-priming that resulted from their independent money creation.  The point is, there is no logical reason why that policy cannot be replicated minus the dark side, as fascism/racism/sexism/militarism is NOT a prerequisite for sound fiscal and monetary policy, any more so than it is for making the trains run on time like Mussolini did.

And just in case you thought that this "one weird trick" was peculiar to fascism, keep in mind that Hitler in fact got the idea from--wait for it--ABRAHAM LINCOLN.  Yes, really. Meanwhile, fascist Austria did the opposite under Dolfuss and Schuschnigg, and they messed the economy up so badly that the Austrian people actually eagerly welcomed the Nazis when they eventually took over in 1938.

Bottom line:  we know now what economic policies really work in practice, as opposed to half-baked voodoo economic theories and crank science.  As the saying goes, "it's the economy, stupid!"  So how long till we finally get it right?