Ben Bernanke and the Federal Reserve are fibbing when they say the Fed is holding interest rates low through 2014 in the name of economic growth.
The Federal Reserve realizes that once interest rates are allowed to return to normal levels, the interest payments on our $15.6 trillion national debt will spike—sending our already unsustainable deficits even higher and dooming the American economy to a Greece-like failure.
The Fed is essentially keeping money cheap to keep our debt interest payments cheap.
Not only will the Fed-subsidized national debt ruin the economy for my generation, the unsustainable conditions brought about by the Fed will also flood the economy with massive inflation. This one-two punch will further destroy any hope of jobs and economic achievement for America’s youth.
In the aftermath of the 2008 financial crisis, the Federal Reserve vowed to hold short-term interest rates around 0 percent in order to stabilize the economy and the financial system. “In this environment, the Federal Reserve has determined that an accommodative stance of policy with low interest rates is necessary to help promote a stronger pace of economic recovery and to help ensure that underlying inflation does not move even lower over the medium term,” according to the Federal Reserve.
However, America has yet to see substantial economic growth and the unemployment rate has stubbornly held above 8 percent.
Bank lending also hit an all-time low in the years following the financial crisis. Daniel Thornton of the St. Louis Federal Reserve attributes this to many possible reasons:
“(i) weak loan demand associated with regulatory and cost uncertainty and a somewhat anemic recovery; (ii) capital ratios below their desired or required levels; and (iii) unprofitable lending due to interest rates at or below the cost of capital, thereby encouraging banks to hold excess reserves rather than make loans.”
In order to keep short-term interest rates low, the Fed has pumped an incredible amount of money into bank reserves. The Fed is currently paying banks an interest rate of .25 percent on over $1 trillion dollars of excess reserves—creating a disincentive for banks to lend money in a state of economic uncertainty.
Economic growth requires an environment where businesses are allowed to expand by taking out loans to finance these projects. So why is the Fed allowing the interest rates to remain at record low rates?
It’s simple: allowing interest rates to rise would send our interest payments on our $15 trillion debt soaring. These annual payments are already $3,000 per taxpayer.
In order to finance America’s persistent deficits, the treasury has had to issue trillions of dollars of bonds. Simple economic models tell us that when the treasury continually issues bonds, prices drop and interest rates rise.
However, with trillions of dollars in debt and continual issuing of treasury bonds, interest rates on the national debt are only 2.717 percent, down from 3.009 percent just a year ago. How can this be?
The Federal Reserve has a powerful tool that can directly control interest rates in their favor: Open Market Operations. By monetizing the debt—conducting open market purchases of bonds—the Fed is able to keep interest rates and payments extremely low by injecting money into the financial system.
The Fed’s behavior has worked in their favor for the time being. Unfortunately, this behavior is unsustainable.
As the economy continues to slightly improve, banks are starting to lend out the trillions of excess reserves the Fed has so graciously supplied.
Once this starts to occur, inflation is inevitable. In fact, consumer prices are up 1.7 percent this June from a year ago.
Inflation will also put upward pressure on interest rates—exactly what the Fed was trying to prevent in the first place. Without more responsible Fed action, our future looks bleak. Pundits and policy leaders warn about “our children and grandchildren” being harmed by the national debt in the distant future. Our day of reckoning is coming sooner than they think.
With youth unemployment already around 17 percent—the highest since World War II—and the national debt burden per person over $50,000, the coming massive inflation and deficits threaten to fundamentally transform the United States and put our best days behind us.
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