Interest and Inflation

I WAS RECENTLY ASKED WHY HIGH INTEREST rates slow down or potentially reduce inflation.

And that question comes from the fact that raising interest rates is the strategy/solution we hear about the most.

The market is flooded with money by the federal reserve (printed money through Quantitative Easing) at low-interest rates. Then the cry to slow inflation by raising interest rates comes, which was created by flooding the market with money in the first place.

Central banks make the mess and make money along the way.

I’m going to repeat that… Central banks make the mess, decide on how to clean it up, and make money along the way.

Central banks make money in a few ways, primarily through what is known as seigniorage plus interest on a variety of assets they hold.

Seigniorage: This is the profit made by a central bank from issuing currency. It’s the difference between the face value of money and the cost to produce it. For example, if it costs 10 cents to print a $20 bill, the seigniorage, or profit, would be $19.90.

Interest on Assets: Central banks also earn money on their portfolio of financial assets. These assets include government bonds and foreign currency reserves. When a central bank purchases a government bond, for example, it earns interest over the life of that bond. And higher interest rates on those bonds, benefit the central bank.

Lending to commercial banks: Central banks can also make money by lending to commercial banks in times of need. The interest charged on these loans is a source of revenue.

Even though the Federal Reserve has a government-appointed chairman, make no mistake, this is a private business.

The Federal Reserve is not federal and without a reserve.

That’s right, our government does not own the money supply.

It is actually owned by the central bank, The Federal Reserve.

The Federal Reserve justifies printing money – well they call it printing even when it is not.  

This is money that was flooded into the economy with a very low-interest rate, initially.

There was so much money given in 2020, 2021, and 2022 that it was often referred to as free money.

And semantics matter.

It doesn’t require actual printing of money when the Federal Reserve issued government treasuries- money created out of thin air or more accurately with the stroke of a keyboard.

This is money neither correlated nor attached to value creation. Yet this money was justified in order to supposedly create stability for banks, infrastructure for corporations, spending for the government, and payouts to citizens during the lockdowns.

And, how exactly are these dollars repaid?

Tax revenue?

Good luck.

When we have a deficit, it means we don’t have enough cash to balance the budget from year-to-year.  There isn’t even enough tax revenue to pay for the interest and current spending.

And when the government needs to finance its deficit, it can issue Treasury bonds to a variety of entities, including individuals, corporations, and foreign governments. When these entities purchase a bond, they are effectively lending money to the government, not ideal, but fair.

However, as just mentioned, the Federal Reserve also has the ability to purchase these Treasury bonds.

When the Fed buys these bonds, it essentially creates money out of thin air – this is often referred to as “printing money”, although no actual physical money is printed.

WTF?

The Fed creates this money electronically, by increasing the balance in the seller’s reserve account. This process is part of what is known as open market operations, which is one of the tools the Federal Reserve uses to implement monetary policy and fucks our money.

During times of economic stress, the Fed justifies the purchase of more bonds in order to inject more liquidity (cash) into the economy. This will create inflation that the Fed will eventually argue must be slowed through raised interest rates.

So, the higher interest rates benefit the people who are the main culprit of inflation in the first place; the private banks, AKA central banks, AKA “The Federal Reserve” in the name of helping smooth out the economy.

Yes, it is from the hand and policy of the people who benefit most from bad policy, high-interest rates, bailouts, and government spending that we find ourselves in a predicament that confiscates wealth, increases stress and impairs quality of life (the opposite of what the policy was said to do).

And, there are times the government debt is handled by justifying more debt, therefore making the problem even worse.

That is when the whole charade of debt ceiling talks happens.

Remember those recently?

Where articles and information were everywhere, with the threat of a social security default or potential default on government-issued bonds, again, to justify more spending.

Adding more money without value, causing inflation, then raising interest rates to battle inflation caused by printing more, or often merely adding to computer screens.

Vicious cycle.

So, they send out tons of money through Quantitative Easing, then say there is inflation, and raise interest rates, getting paid more on the increase with treasuries.  

Oh, but hey, don’t worry, because, in March 2020, the Federal Reserve initiated Quantitative Easing, stating that it would buy “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions” and went from 4 trillion to about $8.4 trillion of Treasuries in less than 2 years. Oh, but don’t worry, they gave 90 billion back to the government after 2020 to share in the profits.

Wolf in sheep’s clothing.

Fox in the hen house.

Creating the problem and the solution.

Thanks the fed.

So why do they say raising interest rates lowers inflation or slows inflation?

It is because people, everyday hardworking citizens, that are living paycheck to paycheck or servicing consumer debt, end up spending more money on interest and less on other items.

Inflation hurts the middle class and the poor the most.

It hurts those that are struggling to make ends meet, spending what they make to survive and with the least discretionary income.

The amount of discretionary income is lowered as more money goes to interest: Student loans, car loans, and mortgages.

This can really harm the economy, again, especially the poor and middle class.  

For example, as interest rates increase, payments for new homes increase and create downward pressure on home prices while payments increase. People often buy homes based more on payment than price.

This can also lead to higher rent payments.  It can also lead to a limited supply of single-family homes while more apartments are built. This happens because those with lower, fixed payments, financed before 2022, do not want to sell.  

So even though there feels like a shortage of single-family homes (supply), there are more investors building apartment complexes with increased demand and higher payments required for new homes (even in a declining market).

So, as the interest rate for mortgages goes from 2 percent to 8 percent (a 400 percent markup/percentage increase), and even though the price of homes can drop 10 or 20 percent, the payments are still higher due to the interest rate hike.

The payment on old inventory, on homes bought years ago, before the real estate market run, may be significantly less per square foot than rent.  This is because the payment remains lower with cheaper interest rates and substantial equity in the home due to appreciation. The price of the home may have been 50 percent less at the time of purchase just 5-7 years ago (before the run-up).

To be clear, this has many people stay put because past interest rates are substantially lower, and people hold onto property they would have otherwise sold in a different interest rate environment.

So, in summary, today’s higher interest rates make homes less affordable and the increased demand for rentals/apartments makes it easier for landlords to raise rents.

Here are the facts:

  1. Those that spend money rather than save/invest it gets hit the hardest:
  2. Borrowed funds now cost more.
  3. Savings rates increase, but again, that doesn’t help those living paycheck to paycheck (a few years ago I read an article stating more than half of Americans could not access 1,000 dollars within 24 hours).

Raising interest rates requires families to cut out certain expenses to handle the higher cost of borrowing.

Slowing inflation by requiring money to pay for loans, making the rich richer and the poor poorer.

Nefarious.

The Fed floods the market with money, then gets higher interest paid to them on even more money- 2 to 8 percent is a HUGE increase.  On a 100,000-dollar home equity line of credit, the payment goes from 2,000 dollars to 8,000 dollars per year

A 400 percent increase in cost removes 6,000 dollars from other goods and services and production and instead, it is paid to interest.   That money could have gone to investments, education, and entertainment, and instead goes to banks.

That slows inflation.

Here is another way to look at it.

I once heard that Coca-Cola talks about stomach share.  What percentage of calories go to soda?

Higher interest rates mean the federal reserve has a higher share of the money.  

How does all of this keep happening?

It begins with a story.

A story of fear, but then of compassion.

A false narrative from people who do not have our best interests at heart and are devoid of compassion.

It starts with a fear we won’t be ok- death, through disease or war.

And when the fear rises, the justifying begins.

When the story is strong enough and dire enough, the call for action is imminent.

And with this action, is the justification for debt.  Why we must act now (go in debt) to support those who cannot support themselves.

It tugs at our heartstrings.

What will happen to the people we love?

What will happen to the people who can’t fend for themselves?

I get it.

We want to help.

But what if the policy to protect hurts more than it helps?

What if it makes the problem worse through inflation and then the raising of interest rates?

When money is printed through Quantitative Easing (QE), what happens next?  

Again, ask, where does the money actually come from?

Thin air!

Digital balance sheets!

Maybe this is why people are concerned, losing trust, and asking these questions:

Is the game rigged?

Are there backroom deals, cronyism, systematic corruption, political favor, and short-sidedness destroying the value of our money?

Could it be entrusting and hoping the government will take care of it, take care of us, yet they might have been bought, or are incapable, incompetent, or impotent?

For now, it is clear that misinformation, misdirection, justification, fear, and ignorance are key to the demolition of the middle class and devaluing our money.   

The solution?

Create economic independence.

Invest in yourself to increase your value and skillsets.

Stick to fixed rates rather than variable rates.

Build up liquidity to capitalize on opportunities.

Plug financial leaks so you can be more efficient and keep more of what you make (save on tax, interest, non-performing investment fees, and duplicate coverages with insurance).

Build your Relationship Capital

Stay informed, not indoctrinated (less news, more books and intelligent conversation).

Focus on what you can control – your production.

Consider Bitcoin.

Buy assets that appreciate in value and create cash flow along the way.

There is more depth to each point, but this is a great start.

Finally, move forward by focusing on your greatest asset – yourself.

The stock that matters most is you.

Are you taking care of yourself, protecting your mindset, and doing things on a daily basis to invite prosperity and live abundantly?

If you want more support, I am doing a new YouTube segment called What Would Garrett Do? where you can ask me questions that relate to your situation and concerns.

Head over to GarrettGunderson.com/WWGD, fill out the form and I’ll respond via video.

And let’s continue the conversation of empowerment and intelligence amidst the chaos.

You are not alone.

We are in this together.

I’ve got your back.

I’d love to hear your thoughts. Comment below.

Do you know someone that might benefit from these insights, musings, and stories?

Please share!

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