Can you imagine putting money into a bank and agreeing to accept a minus 5% rate of interest? Well, the Federal Reserve believes the appropriate rate of interest for this economy is in fact -5%. The FT reports, “Fed Study Puts Ideal U.S. Interest Rate at -5%.”

The world is awash in a sea of debt. The debt is piled highest in Europe on a relative basis while in actual terms the debt in the United States outpaces all other parts of the world. As the deleveraging process continues, the demand for new money to spur growth is anemic. The paradox of thrift is keeping our economy in a state of stagnation. The Fed and U.S. Treasury are utilizing all tools in their box to restructure debt and promote lending without risking default. Ultimately, all the Fed and Treasury programs will devalue the debt via inflation. Inflation, in which future dollars are worth less than current dollars, is akin to paying a negative rate of interest on money.

So when you think of the policies being promoted by Geithner, Bernanke, Obama, Summers, Jarrett, Orszag, and the rest of the administration, review them in light of that rate of interest on your money.

As the FT reports:

The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve’s last policy meeting.

The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation.

A central bank cannot cut interest rates below zero. However, the staff research suggests the Fed should maintain unconventional policies that provide stimulus roughly equivalent to an interest rate of minus 5 per cent.

Fed staff separately estimated what size and type of unconventional operations, including asset purchases, might provide this level of stimulus. They suggested that the Fed should expand its asset purchases by even more than the $1,150bn (€885bn, £788bn) increase policymakers authorised at the last meeting, which included $300bn of Treasury purchases.

I do believe this report as being accurate of the administration’s intentions. At every turn, members of the administration have put forth proposals and policies consistent with this negative interest rate approach. It would be foolhardy to think that the administration will stop now. Thus, we should expect a continued expansion of the Fed’s balance sheet, more quantitative easing, more capital injections into the banking system, and no hesitation at ongoing fiscal stimulus. Will Congress look to impose fiscal discipline? Do you really think Nancy Pelosi, Harry Reid, Chris Dodd or any other liberal Democrat will stop spending especially if they are told it is the right approach? They have lived for this day.

The end game will be inflation. The administration wants it. The risk is hyper-inflation.

How do stocks react to a bout of inflation and potentially hyper-inflation? Very good question. Companies with pricing power should do well. Those companies without pricing power will likely suffer.

How do bonds (fixed income instruments) react to a bout of inflation and potentially hyper-inflation? Bonds will decline in value precipitously.

What do market participants think?

LD

  • Daisyjane

    Boxer Mum,

    GREAT POST!

    The founders wanted our states to be incubators of ideas, before foisted on the nation at large. That would be one of the most interesting ones I can consider. It would be fascinating to see a single state try something along those lines and then study the consequences!

    Well done, lady. 🙂

  • Daisyjane

    I had to read that twice. Thought it was from The Onion. LOL

  • oops–the first was supposed to be: http://www.lewrockwell.com/paul/paul511.html

  • I want to scream in O’Geithner’s face:

    One of the problems is they continue to promote the idea of Keynesian ‘priming the pump’. How can spending be the answer? We’ve been doing this (both individually and our government) for decades, and it has brought us to the brink:
    ttp://www.lewrockwell.com/paul/paul511.html

    We cannot demand ourselves wealthy. (I know—I’ve tried. 😉 ) We cannot vote ourselves rich:
    http://capitalisthero.com/Keynesian_Economics.php?gclid=CPf26aPjnZkCFRWbnAodvHMUDA

    Spending would only prop up the bubble temporarily. The longer we do this artificially, the more difficult the correction will be in the end. We need to change course. Instead of creating a bubble economies, we need to increase production of goods and services—stuff people (preferably outside our country) will buy. THAT is the real way to increase stability and grow the economy—a real economy, not an artificially supported one. And people saving helps to that end: they put their money in the bank and businesses can borrow it to grow.

    This suggestion to go to an equivalent of -5% is deplorable. What about all the people relying on a little interest from their retirement savings? (or at least that it doesn’t loose value) And how is the middle class, already trying to save for retirement, kids’ college funds, and pay off mortgages and other loans, supposed to benefit from this? (rhetorical) Plus we’ve got the kids and future generations already owing before they even learn to walk and talk and voila—all the normal people out here (ie in nonObamaland) get wholloped.

    All of these bad decision and this administration’s display of ignorance are creating hesitancy and further uncertainty in the markets: http://mises.org/story/3413 Businesses are on hold thanks to the shenanigans–THAT is the problem. Thanks, Obama, Geithner et al. You are idiots.

    PS–Audit the Fed!!!!!!!! HR 1207 http://www.youtube.com/watch?v=hlmXUiEgNO8

  • Portia Elizabeth Crockett

    Oh sure, -5% sounds great. In fact I should just take my pay check and send it directly to the government. They’re telling me I don’t really need it anyway. Or maybe I should grind it up and put it on the compost pile. At least that way it’ll eventually grow something.

  • bayareavoter

    Congressman Tom Campbell, who is running for Repub Gov of California, wrote about the inflation problem in yesterday’s SF Chronicle:

    http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/04/27/EDTC175INR.DTL&hw=tom+campbell&sn=005&sc=685

    I really am afraid Geittner and Co. are making things worse, especially when combined with the out-of-control spending planned by the Dems. Some Dem ideas are good but implementing them now seems irresponsible.

  • Peggy Sue

    Just as an aside, Larry, I caught an excellent C-span interview with Janet Tavakoli on Q&A. It’s an hour long, but for people who want an overview of how we got here and what a mess the Treasury Department is creating, I think it’s time well spent. Tavakoli is Chicago based and has worked in the financial services industry. She knows a lot of the people involved and makes a very clear and convincing case about what she terms the “financial meth labs” that have brought the house down, as well as how we, the taxpayers, have and are continuing to pay for the malfeasance of the banksters.

    Karl Denninger’s site has the vid posted here,
    scroll to the bottom:

    http://market-ticker.denninger.net/

    I think the only defense we have is continuing information.

  • blogforce one

    Can anyone say Weimar Republic II ??

  • Tricia Spiegel

    Larry, should we be thinking about putting our cash under the mattress?

  • ScottVA

    I’m part owner of a REIT and also a finance man…. I will just say this… the Gov’t would be in a lot better position to just become direct lender to businesses (in a responsible way, of course).. lending money for projects directly (instead of giving to banks and hoping they will)… they could charge the Prime Rate or better and in 9 cases out of 10 have made a very sound decision! This is what would help spur the economy again!

  • Doc99

    Middle-class Tax Cuts, we hardly knew ye.

    … But the plan would allow Obama’s signature $400 tax cut for most workers and $800 for couples to expire at the end of next year.

    Hope …

  • Docelder

    So what is the most inflation proof investment right now? Real estate for one… because it’s already been devalued. Is there any question now why banks are sitting on these empty houses? They would rather sit on them than have a 30 year note for an amount of money that won’t be worth anything in thirty years with the inflation that is coming. So, all we have been doing with TARP is allowing bigger banks to eat up the real assets of the smaller banks, and to fund the ability for them to hold tight with what they have. Meanwhile, we foot the bill, as our life savings devalue.

  • FrenchNail

    First I heard the idea conceptualized. But that confirms exactly what my guts were telling me. And now the IMF is lending to the US…. Yep. we are in big doodoo…

  • NomNomNom

    it seems like the only way to not enrich these POS is to not use money at all. Maybe we should try to switch in as much as possible back to some form of local currency, especially one backed by say silver. It might not help via one’s mortgage but it could work for car purchases on down. I really don’t like even .000001c of my money going to these thieves. 🙁

  • Boxer Mum 06

    Someone sent this to me today in email. I thought it was great and so simple, it surely couldn’t work.. could it??

    This is from an article in the St. Petersburg Times Newspaper on Sunday.

    The Business Section asked readers for ideas on “How
    Would You Fix the Economy?”

    I think this guy nailed it!

    Dear Mr. President,
    Please find below my suggestion for fixing America ‘s
    economy. Instead of giving billions of dollars to companies that will squander the money on lavish parties and unearned bonuses, use the following plan. You can call it the Patriotic Retirement Plan:

    There are about 40 million people over 50 in the work
    force. – Pay them $1 million apiece severance for early retirement with the following stipulations:

    1) They MUST retire. Forty million job openings –
    Unemployment fixed.

    2) They MUST buy a new American CAR. Forty million cars ordered – Auto Industry fixed.

    3) They MUST either buy a house or pay off their mortgage – Housing Crisis fixed.

    It can’t get any easier than that!

    P.S. If more money is needed, have all members in Congress and their constituents pay their taxes…

    If you think this would work, please forward to everyone you know. If not, please disregard.

  • Peggy Sue

    I read an article over the weekend indicating that the salary levels on Wall St. were back to “pre-crash” levels. How can anyone square this with the average worker who, even if he/she still has a job, has watched their salaries freeze up, pensions stall and reitrement savings accounts ravaged? Add inflation [or God forbid hyper-inflation]to the mix and everyone will be on their knees.

    And I don’t see anyone in Congress willing to put the fiscal brakes on. And Susan ran an article over the weekend, indicating that Elizabeth Warren, the financial watchdog, is being deliberately undermined by Nancy Pelosi.

    It’s like seeing an oncoming trainwreck. And we’re all on the train.

  • Tom Cat “wodie j” Jefferson Esq

    -5% interest? You’ve got to be kidding??

  • Linda Anselmi

    Great post LD –

    And so now that consumers can no longer afford to borrow and spend, any funds the american people have left or some how manage to conserve will be eaten up by inflation. Great way to finish off the american people.

    I don’t see how this isn’t going to be worse than the great depression.

  • As it stands now, the FDIC is holding the banking industry hostage, demanding they increase their cash portfolio. In turn, the banks are using their credit card divisions to squeeze the consumer dry. and the banks are losing money because they are approaching the situation opposite from what needs to be done.

    It is absolutely backwards and wrong. Lower interest on old debt, don’t raise it.

    http://www.Daily-Protest.com

  • Please bookmark http://www.Daily-Protest.com and support my effort to take on the credit card industry. I am a true outsider with ideas that would help middle america help the economy.

    The one trillion dollars in credit card debt continues to of escalate because of outrageous interest rates. All credit card debt that is older than two years needs to have all additional interest charges waived.

    This would instantly provide spare income for those who still have a job, but also have credit card debt, to either, save money or put towards debit cards even as they pay down their old credit card debt.

    This in turn would create micro stimulus packages on a city by city basis. No government bailout would be necessary.

    Consumers need to have as a right, not a privilege, the right to “OPT OUT” whenever a credit card company changes terms.

    And Chase bank needs to keep their word.

    Please support http://www.Daily-Protest.com

  • MrMike

    When do we ask the CEOs at these financial institutions to start sharing in the sacrifices the rest of us are expected to make?
    In other industries employees are taking pay cuts and foregoing bonuses.
    When will Obama force the financial sector to do the same?
    I know, don’t hold my breath.