Low Interest Rates And Austerity (Updated)

I have said this a number of times.  It’s unarguable, and is a significant piece of the ‘financial crisis’ puzzle, but no one seems to take it into consideration, unlike everything else I write on this blog about the financial crisis which is immedately picked up by prestigious academic journals on its way to becoming the new orthodoxy.

Wait, did I say that?

Anyway, the problem is that even very bright and economics-knowledgeable people, when they discuss the seemingly perpetual low interest rate environment, see the situation in terms of “easing” and “easy money” and how “lax” and “accomodating” the Fed is being by keeping rates low, not to mention promising to keep rates low basically forever.  And the truth is that although you might argue this, I think the better argument is precisely the opposite:  the low interest rate environment is not about stimulating the economy and easing economic burdens, it is about preserving the status quo and keeping burdens where they are:  keep the rabble in debt and servitude to the creditors.

And now you don’t have to take my word for it, because someone else with an actual pedigree has actually acknowledged this idea.  Not the implications of it, you can still find that only here on this blog, but the basic economic fact of low interest rates and their impact on existing debt:

Also, the price of debt fluctuates with interest rates. Debt issued at low interest rates can be repurchased at steep discounts when interest rates rise. This means that if debt-to-GDP ratios are what matters, we will have a great opportunity to quickly reduce this ratio when interest rates rise later in the decade as is widely predicted.

It’s a fundamental truth that drives the bond market:  a rising interest rate environment is terrible for bonds; a declining interest rate environment is great for bonds.  Because, as the quote above rightly points out, the face value of the bond rises or falls accordingly.  If I have a $100K bond paying 2% interest and market interest rates are 8%, who’s going to pay $100K for my bond?  If I want to sell it, I have to “discount” the price, you know, a lot.  Maybe my $100K bond would only sell for $25K.  But if the situation is the reverse, and I have a $100K bond paying 8% and market interest rates are 2%, well then so many people want my $100K bond that I can prally sell it for $150K, because where else are they going to get an 8% yield?

This is not rocket science, as they say.

But here is where my take on this situation has been what you might call unique.  At least I haven’t seen it anywhere else.  Apply this unarguable, basic principle to the economic situation as a whole, where you have a highly indebted populace, whether in Greece, or the EU or Japan or God help us all the United States of America.  Who benefits from the low interest rate environment?

Why, creditors of course.  They are the bond holders.  And that this is actually the same word root as “bondage” is not a coincidence.

Thus low interest rates are a mechanism to keep debtors in bondage to their creditors.  To keep people in thrall to the banks.  This is so clearly the result of the low interest rate environment that it’s hard to believe it isn’t the intended result.  And if it’s the intended result then all the talk about “easing” and “accomodating” and so forth is not only wrong but deceptive.

But they let the cat out of the bag when they start talking about “austerity”.  Forget that the whole idea – this “austerity” thing – is the product of paternalistic bankster ideology coupled with elementary errors in data collection and interpretation that any hard-partying grad student can figure out, because what else could you possibly expect from anointed Harvard economics professors like Rogoff and Reinhart?  I mean, that’s why they’re anointed in the first place.

They’re very reliable, I mean.  That’s how you get anointed.

No, what I would like you to focus on here is that no one, anywhere, not nohow, not no way, has ever suggested that the most oppressive “austerity” you can think of is in any way incompatible with a low interest rate environment.  All I have done is take that very unexceptionable consistency a step further and declared that, in truth, artificially low interest rates are a fully intended feature of austerity, not the “accomodation” to borrowers that is so often portrayed.

The social science of economics in a “managed” economy is about obfuscating, not illuminating.  If you’re running the economy and you’re too clear about what you are doing and why, people might change their behavior accordingly and that ruins the experiment.

And, oh, you have to keep this in mind:  the experiment is more important than you are.  They’re not being gratuitously cruel, it’s just that any real fix for the situation that doesn’t involve further oppressing you would break all the models.  So you’re going to be oppressed some more, but not too much, at least not in the near term, and at least not so much as you and the other rubes will notice or if you do at least you won’t be able to discern who your oppressors are.

In other words, it’s coming to a theater near you – “austerity”, that is – but eventually it will be called something less inflammatory.

And less truthful too, of course.

Update:  Another feature of “austerity”:  20% of households on food stamps.  Gotta keep them fed or they’ll riot.

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