Why the Fed Should Not Have Lowered Interest Rates
By: Jp Kobel
Tags: Economics, Monetary Policy, Fiscal Policy, Negative Interest Rates, Politics

What will we do if we cut our interest rates to zero and it isn’t enough to stimulate the economy? The answer is that we have to go to negative interest rates. Negative rates are a terrible thing. See Negative Interest Rates Have Become an Addiction from Barron’s for a discussion of Europe’s problems with negative interest rates. Negative interest rates are a ‘tar baby.’

One could argue that negative interest rates are not necessary since what the economy really needs is well planned fiscal policies to put money into the hands of the middle class. Yet, does anyone really expect anything to get through Congress anytime soon?

The Fed Only Cut Rates to Support Trump’s Trade War

According to Fed Chairman, Jerome Powell, ‘the rate cut is an insurance policy against potential speed bumps for the economy, including rising trade tensions and a slowdown in global growth.’ See Fed Cuts Interest Rates for 1st Time Since 2008 from NPR for more on this rate cut.

The Fed needed to maintain independence and not become complicit in an ill-conceived trade war. Had the Fed not cut rates, it would have put more pressure on the Trump Administration to abandon its destructive tariffs.

How could a President think it would be a good idea to attack the entire world, allies and not so friendly nations, with protectionist trade barriers simultaneously? The Fed just ensured a continuation of this insane policy. This trade policy has little to gain and much to lose. Winner or loser, the President will claim victory and his supporters will agree with him. Meanwhile, our crops that would normally have been exported, are rotting in the fields. The longer this policy continues, the greater the chance of entering into a new recession. Since many of the systemic problems that led to the Great Recession have not been fixed, this next recession may be known as the ‘Greater Recession.’

The Problem With Negative Interest Rates

Normally, when a person makes a deposit into a bank, he or she is actually making a loan to that bank. The bank adds the value of these deposit funds to its fractional reserves and can them make loans based on a multiplier of the amount deposited. The bank pays interest to the depositor and received interest from the borrower. This is the way the world is supposed to work.

When a country has negative interest rates, money flows in an upside-down fashion. The bank charges the depositor interest in order to keep money in the bank and pays the borrower interest in order to borrow funds. This is crazy, yet these negative interest rates are a reality in many European countries today.

For many bank depositors, the change to negative interest rates will not really matter. As hard as it is to believe, many depositors still do their banking at institutions that charge monthly fees and do not pay interest on the deposits. For a large portion of Americans, these negative interest rates will matter though.

In Order to Keep From Losing Money, One Either Has to Be a Borrower or a Cash Holder

In the upside-down world of negative interest rates, to keep one’s bank account from dwindling due to negative interest rates, one would need to become either a borrower and therefore be paid interest or to remove money from the bank and carry cash.

In a recession, a lot of people carrying substantial amounts of cash would be targets for crime. Many of these targets of crime would be in more impoverished areas because of the generally lower credit scores of the people living in these areas. These people would not be able to borrow and therefore be paid interest, but instead would either have to pay interest to banks or carry cash. How would the government respond to such crime waves?

Negative Interest Rates Would Increase the Need for a Cashless Economy

The solution for these problems with negative interest rates is to go to a cashless economy. On the surface, there may be many advantages to having a cashless and/or cryptocurrency economy. For the most part, many of us are already living in a cashless economy through the use of debit cards and credit cards. Cashless to this extent is just fine. However, a completely cashless economy is a terrible idea.

When a person can hold actual physical currency in their hand, there is a degree of freedom that will never exist in a cashless economy. For example, what if you have a disagreement with a creditor and they gain a judgment against you without your knowledge. That creditor could remove some of your ‘cashless’ money. On the other hand, the same creditor cannot come and get cash out of your pocket — at least without your knowing it first. Failure to be able to carry cash will result in abuses of the due process rights of individuals.

Conclusion

Does anyone want to live in a world where one has to borrow in order to keep their bank account from shrinking? We must avoid the use of negative interest rates. Income and wealth inequality will only grow worse if we live in a world where the three-digit code that represents one’s credit score is a determinant of whether your bank account shrinks due to negative interest rates or your bank account grows.

People of lower financial means usually have lower credit scores due to inability to repay debts. Therefore, the upside-down world of negative interest rates will leave these people with shrinking accounts that lead to a more desperate situation. Debt, to a degree, is a form of personal enslavement.

I spent a good part of my life trying to relieve people of their debt. I fear that a world of negative interest rates and cashless societies will lead to a dystopian reality where we will only be able to buy and sell based on our three-digit credit score. Currently, we have an economy where we can refuse to be a debtor if we do not want to be a debtor. A cashless/negative interest economy would make ‘choosing’ to be a non-debtor much more difficult.

A real economy must be based on the concept of ‘value exchanged for value’ not ‘debt for less value.’ It is time that the Fed stand up and assert its independence. By doing so, the Fed will force American voters to elect responsible leadership. Any responsible leader would realize that America must stop relying solely on monetary policy. Any responsible leader and political party would be pushing fiscal policies to lift the middle class as opposed to fiscal policy that results in large wealth transfers from the middle class to the wealthiest Americans, e.g., tax cuts for the wealthy.