16A022 Low Interest by Jim Davies, 6/14/2016    

Usually here in the Zero Government Blog, there is offered a perception worked out fairly fully, and presented as a conclusion for the reader to consider. They are, as promised, "rational, refreshing reflections on what's happening now", but aren't tentative.

This one is an exception; I'm asking more than telling. Something seems odd, and needs explaining. A possible answer is offered, but better ones may emerge.

It has to do with the notoriously low interest rates that have prevailed for the past eight years. Banks used to pay 2% or 4% on deposits, even on checking accounts, but not since the Great Recession hit; since 2008 they have been way under 1% and at first sight one might wonder why they bother; the reason has to do with tax. If no interest at all were paid, one of the excuses for bankers to share your confidential information with the IRS would disappear.

The Fed now no longer pays interest on money borrowed, but as noted by Forbes contributor Richard Lehmann (June 21st issue) "we have now moved... to paying government for the privilege of holding its debt."

Not only do they pay an absurdly low rate, they charge very low rates also, when lending money for buying houses or growing businesses. This is said to be governed by the Fed, though some reckon the Fed "sets" interest rates only after market demand indicates what they ought to be; but in any case, by deliberate government policy money has been very cheap to borrow and that's its "stimulus" designed, they say, to "boost the economy" just as Keynes promised.

Except that it hasn't worked.

That failure may tell us that the reason given is mendacious: rates are being kept low not so much as to boost business, as to bail out government. The FedGov owes $19.3 trillion. If it had to pay interest on that at 2% the cost would be $386 billion a year but if the rate were 5% the cost would be $965 billion, pretty well the total amount they confiscate as "income tax" and nearly half of all federal revenue. They simply can't afford to let rates rise, for every dime they spend on interest can not be spent on the purchase of votes.

Now check the implications. When money is cheap, we'd expect borrowers to line up and loans to be made as fast as computers can crank them out. But it's not happening; banks are reluctant to part with money unless the collateral is rock solid. Long gone are the days of "no-doc" mortgages (which dispense money for homes just upon request, with a point or two added to the interest rate) written in compliance with the Community Reinvestment Act which caused the housing bubble in the first place; it's just as if we're back to the old days of highly conservative lending practices. You get a loan only if you can prove conclusively that you don't need one.

That's the anomaly; money is cheap, but ordinary mortals cannot borrow any. It's a bit like the Soviet Union; food and other prices were wonderfully low, but the shelves were empty.

So here's the tentative bit: it looks rather as if this strange paradox could be a deliberate way for government (through its lapdogs, the banking industry) to take control of where money can be invested. It appears cheap, but the price of borrowing is no longer a simple interest rate that can be plugged in to a calculator; it is heavily augmented by an unwritten factor having to do with pleasing faceless bureaucrats empowered to grant or withhold lending permission.

That's how the USSR did it, except that there, capital was invested directly by government departments. Here and now, it's loaned nominally by independent banks, but in reality only when government approves; it's not a communist system, but rather a fascist one. That, at least, is the suggestion I'm making. Does it make sense?

If so, it's quite sinister, because the borrowing of money is important - not just to acquire somewhere to live, but to grow a business. If government b-rats are controlling the money faucet, only those of whom they approve will live in nice homes and only those businesses they favor will prosper. Everyone else will have to grow his own capital; no bad thing at all, but formidably difficult when profits are ripped away by taxation.

In the coming zero government society it will be very different. First and foremost money will be something people value, such as gold. Then, those who own some will be free to lend it on any terms they see fit. They will, naturally, balance security against probable return and so there will be a wide range of lending policies among which borrowers can choose. Interest rates will on average be close to the economy's overall growth rate, for there will be no mechanism for inflating the supply of money (beyond the slow process of mining more gold) and in turn that will mean its growth will be reflected mainly in the reduction of prices of goods produced, which has not happened since the 19th Century.

The process will certainly allocate resources optimally, as judged by those who own them. There is no better way to promote prosperity and wellbeing. And that's a future of very high interest.

Last week, Kerstin died. No man ever had a wife more sweet, patient, gentle or loving. I have been extraordinarily fortunate, for over half a century. It will be a while before I can get back into kilter. To save returning here fruitlessly, at the page top click on Get ZGBlog's RSS Feed; you'll then be notified when the next edition appears.