A week ago, the Federal Reserve, the corporatist entity that actually runs the US (and thus the world) economy, raised interest rates a little, going from .75 percent to 1 percent. Remember that the Fed set interest rates to zero back in 2008 to keep the US economy from collapsing completely. Europe is so bad that many of its interest rates are negative. Isn’t that crazy?
Is this a bad thing or a good thing?
It’s complicated, but I will do my best to summarize.
1. Low interest rates are good for borrowers and usually good for business, but terrible for savers. If you want a debt-based, consumer-based economy, you want interest rates as low as possible. If you want an economy with lots of solid, solvent savers, you want interest rates to be moderate. You almost never want interest rates to be high, since that harms overall economic growth.
The last few years have been horrible for savers. A bank savings account or short term CD pays less than 1% interest. We’ve basically become a zombie economy like Japan, and it sucks.
On the flip side, it’s been easier to borrow money. This is good for short-term economic growth, since more people can buy more stuff and businesses can expand easier. The problem is that it just encourages more debt, and the US has more governmental and personal debt than any other nation in world history. We don’t need more debt; we need less. Debt will eventually destroy the USA. Just watch.
2. Interest rates should be a function of the free market. Non-corporatist, non-government-wedded banks and other financial institutions should be the ones who set their own interest rates based on the needs of the market. Instead, we have a government-backed (though theoretically “private”) central bank called the Federal Reserve that dictates what interest rates should be.
This is very bad, because since it’s inception in 1913, the Fed has destroyed 93-97% of the value of the dollar (depending on how you crunch the numbers). Defenders of the Fed respond by saying that this loss in value is “okay” since you’ve been able to earn more interest on your savings in that time, but even they admit the purchasing power of the dollar has been decimated. That means inflation, and that means everything you buy costs more.
3. Interest rates are way too low right now. They need to increase to adjust for market forces, and they aren’t, because of the government’s stranglehold on them.
When people hear that, they scream. They cry that the economy would crash because the US economy is so weak right now that it can’t handle higher interest rates.
That is correct, and that’s exactly what should happen. We should increase interest rates right now, and the economy should crash right now.
Why? Because the longer we temporarily hold off a future economic crash (via artificially keeping interest rates low, printing trillions of dollars, and increasing government spending), the worse the eventual crash, that will happen, will become.
The US economy is like when you have cancer and all you do is pop aspirin every day instead of getting your ass to the doctor. The longer you wait to fix the problem, the worse the problem becomes. The US has cancer, and we’re just popping aspirin. If we go too long doing this, the cancer will kill us. Of course, I use the royal “us,” since I personally won’t be here if/when this happens.
So, expect the Fed to continue to raise rates just a little tiny bit, about once or twice a year, doing so very carefully so they don’t crash anything.