The Golden Age of Exquisite Interest Rates

At the end of the Second World War, America was the world’s sole superpower: we alone had the atom bomb. Although America lost more than 400,000 military personnel in the Big One, her civilian population had remained unscathed, unlike other nations whose civilians had suffered about as much as their military. Upon returning, surviving military formed families with those stateside civilians, and produced the Baby Boom. These returning soldiers also contributed to what has been called “The Golden Age of American Capitalism.”

Unlike other powers, America’s cities and factories hadn’t been destroyed. And we used those intact factories to manufacture most of the stuff we needed, like cars, apparel, electronics, and so on. We also enjoyed a high level of job mobility; if one was bored in one’s job, one could find another one. A competitive materialism took hold, as Americans consumed and acquired to “keep up with the Joneses.”

The halcyon days extended from 1950 to about 1973, when our collective confidence began to sag with the onset of a recession. And the OPEC oil embargo introduced the nation to fuel shortages, lines at gas stations, and soaring prices. By contrast, a gallon of petrol during the gasoline “price wars” of the 1960s might set one back a whopping 27.9 cents. To cut down on consumption, Americans began to observe the new national speed limit of 55 MPH and buy small imports.

The salient thing about 1973 for many Americans is that it was the high point for their postwar fortunes and dreams. Since that year, jobs, wages, opportunity, and hope for the great American middle class have declined.

This year marks a significant golden anniversary: In 1971, America went off the gold standard. The almighty U.S. dollar would no longer be backed by gold. The number of dollars wouldn’t need to correspond with the government’s hoard of gold at Fort Knox and in the subterranean vaults of the New York Fed.

Consequently, for the last fifty years, the dollar has been an entirely “fiat currency.” That allows the Federal Reserve to create unlimited amounts of new dollars, which enables Congress to run ever higher deficits because, as the “lender of last resort,” the Fed will buy the treasuries other buyers won’t buy. With the Fed’s new money, Congress can bail out mismanaged states, Wall Street banks, and citizens whose jobs and businesses the government destroyed in the pandemic lockdowns. But the Fed also controls our fates in yet another important way: its control of certain key interest rates.

Last year, the Wall Street Journal ran “The High Cost of Low Interest Rates” by James Grant, founder of the storied Grant’s Interest Rate Observer. (If you haven’t subscribed to WSJ, the article has been reprinted here.) Grant’s is an important article dealing with the Fed’s excesses; here’s a taste:

Interest rates are the critical prices that measure investment risk and set the present value of estimated future cash flows. The lower the rates, other things being equal, the higher the prices of stocks, bonds and real estate -- and the greater the risk of holding those richly priced assets. […]

In a still more radical vein, the Fed has set about buying (or supporting the purchase of) commercial paper, residential mortgage-backed securities, Treasurys, investment-grade corporate bonds, commercial mortgage-backed securities and asset-backed securities. It has abolished bank reserve requirements. Through a new direct-lending program, the Fed has become a kind of commercial bank.

Note that Grant’s article appeared on April 1 of 2020, just after the pandemic broke out. If one reads the reprint, one will miss the WSJ blurb: “Irresponsible policy from the Federal Reserve made the coronavirus crisis worse than it had to be.”

On May 7, Bloomberg Opinion ran “The Fed Doesn’t Fear Inflation. Its Critics Have Longer Memories” by Niall Ferguson, economic historian. Like Grant’s, Ferguson’s article is also one for these times. It contrasts the current actions taken by the Fed with those from the golden age of postwar history, i.e. pre-1973.

(Be advised, like WSJ, Bloomberg has a “pay wall.” But if you don’t visit there often, they may give you one free read. So read Ferguson’s article on first going there, or, better yet, copy it; I myself made a PDF of it immediately, as I knew they’d block me on subsequent attempts to read. However, if you have some spare Federal Reserve Notes in your wallet, you might just subscribe.)

For the last fifty years, the size and scope of the central government have grown and grown, which was made possible by deficits. In 1971, Congress had already gone eleven years without producing a “real” (i.e. on-budget) surplus. Since 1971, Congress has run exactly two real surpluses, in 1999 and 2000. To contrast, in 1947 and 1948, right after WWII mind you, Congress ran budget surpluses, including the largest surplus since the advent of the income tax in 1913. In fact, from 1947-1960, Congress ran six balanced budgets with real surpluses.

Since the 2008 financial crisis, federal deficits have been largely paid for by the Federal Reserve’s QE and ZIRP, i.e. quantitative easing and zero interest rate policy. And now we’re seeing inflation pick up. Inflation is the great destroyer of wealth, and even nations.

The last Fed chairman to have to deal with significant inflation was Volcker back in the early 1980s. Since then, the Fed chairs, Greenspan, Bernanke, Yellen, and now Powell, have been “accommodative” of the government’s desire to maintain asset prices, as in real estate and stocks. If the Fed does start raising rates to keep inflation under control, asset prices will sag.

So what’s to be done? The obvious correction would be for Congress to quit spending money that won’t exist until the Fed creates it. But the current Congress can’t help itself and is incapable of ratcheting back the promises it has made. The idea of introducing more means testing for welfare and entitlements is something Democrat members can’t wrap their little heads around. Besides, Congress expects the Fed to ride to the rescue. But the Fed can’t do much other than print money and raise interest rates. Some say the Fed will be obliged to raise rates soon because inflation is beginning to be felt by consumers.

Here’s what this kid thinks the central bank should do: The Fed should indeed raise their interest rates, but very, very slowly. The more pressing change at the Fed should be to end their dangerous money printing. The recovery doesn’t need the Fed’s continued intervention; the pent-up demand and deferred investment of the last year all augur for a lusty recovery -- if the government will let it happen. Besides, the money the Fed has created is being wasted, as government pays folks not to work even as employers are suffering a worker shortage.

Much of the economic turmoil over the last century has been caused by central banks like the Fed. One would think that Chairman Powell and his crew wouldn’t want their legacy to be the destruction of the dollar. If America is ever to have a reprise of the postwar Golden Age, the Fed will need to change policy.

POINTER: Those interested in the Fed and interest rates would do well to screen the April video below, “Market Risk Is Near The Highest In History,” from Adam Taggart’s new YouTube series Wealthion. It’s an interview with James Grant, the interest rate guru. If you’re pressed for time, go to the 17:00 mark and listen for just a couple of minutes:

Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.

Image: U.S. Gov

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