Richard Cantillon (1680–1734) observed that when governments inflate the money supply, the effects are unevenly distributed among economic sectors, affecting some more than others and in different ways. …
Knut Wicksell (1851–1926) demonstrated that interest rates function as a price mechanism to allocate investment decisions over time, which is why the yield curve exists. Manipulation of the interest rate disturbs the natural allocation of resources. …
Central banks and bureaucrats setting the price of money:
One can see, then, how a central bank messes everything up. By lowering the interest rate, the central bank fuels the creation of new bank credit that otherwise would not exist. An artificially lowered interest rate acts like fake savings.
Savings are resources drawn from deferred consumption. They serve as the basis for sustainable investment. But artificially low rates signal the existence of savings that are not there.
Not only do low interest rates create fake savings, but they actually draw real savings away from short-term projects toward longer-term projects … They create a kind of subsidy toward capital products that would not exist had the interest rate stayed at its natural market-based level.
Massive distortion is good for bankers and some politicians:
The result then is not just inflation, as the monetarists would describe it. It is also a distortion of the production structure. Capital gets a subsidy over consumption goods, and not only that, but longer-term projects get a boost over shorter-term projects.
Bottom line: The last 14 years of zero-interest rates have created a paradigmatic case of the Austrian business cycle theory. It has massively distorted interest rates, more so than ever before. This was Ben Bernanke’s wonderful innovation. Many people thought his move in 2008 would generate inflation but he found a workaround.
Bernanke paid the banks to keep their new and faked resources locked away in the vaults of the Fed. This kept the hot money off the streets and kept prices stable. But that only solved one problem. It created another: It created huge malinvestments in a whole series of sectors in tech and media and housing yet again!
Some people — some classes — benefited more than others from the massive creation of money out of thin air:
What resulted was a disgustingly overbuilt tech world replete with Zoom-class employees with college degrees earning six figures without limit. Central bank credit caused the creation of an overclass that eventually caused all sorts of mischief, economic and cultural. They invented idiotic ideas like ESG, DEI and woke philosophy in general.
None of this nonsense had anything to do with reality but in Bernanke’s world, reality didn’t matter anymore. This sector got so huge that it became a critical number to push lockdowns under the slogan “Stay home, stay safe.” These privileged elites forced the working classes to serve them food at their doorsteps and face the virus while they luxuriated in their fancy apartments pretending to work on laptops.
The chart that reveals all:
So that we understand the radical nature of this experiment, please study the following chart carefully. This is the federal funds rate adjusted for inflation. What we see is the longest period of production distortion in American history. This chart goes from 1950s to the present.
To keep the bubble going, real interest rates kept being lowered. Now we’ve reached the end. Debt crisis and inflation.
This whole policy becomes unsustainable once the value of the dollar begins to fall due to price inflation. At some point, the central bank has to turn things around. When things become shaky or prices start to shift and the central bank starts to back off its pillaging policies, the house of cards starts to fall apart, as resources are drained from long-term speculation to shorter-term consumption and the restarting of real savings.
That’s precisely where we’re in the cycle. Long-term projects are falling apart. Consumers and investors are turning away from the long parts of the yield curve to make money in the short term. Resources in general are going through a massive shift in terms of time allocation as interest rates shift.
Short term interest rates are higher than long term rates, because a recession is anticipated next year:
That the yield curve has dramatically inverted is hardly a surprise. It is a sign that the ship of production is turning very slowly, and investors are unconvinced yet that the Fed will keep this up.
But that point is that the Fed must keep this up if it intends to get inflation rates back to the target. The federal funds rate will have to enter back into positive territory in real terms. That means 6%, 8% or even 10%, pushing long yields far into the double-digit range.
To be sure, we should all in a macroeconomic sense look forward to a new age of more honest finance. The disaster of zero-interest rate policy is finally coming to an end. …
Remember those days when everything seemed too good to be true? There was a financial crisis that the Fed magically fixed with no downside.
Except that there was a huge economic, cultural and social downside. Frugality and prudence gave way to massive excess and a level of craziness in culture that we never imagined we would experience.
What made this preposterously unjust system possible was the Fed with Bernanke at the helm. Quantitative easing turns out to mean upending all normal life and paying the horrid price for this a decade and a half later.
Another view of the bubble we’ve been in since 1982: