Artificially lowered interest rates cause stagnating wages and unemployment
Hugo Salinas Price 11 December 2014
Professor Antal E. Fekete has made a remarkable discovery in the field of Economics: artificially lowered interest rates - the fundamental instrument of economic intervention in all the developed countries, practiced in the US by the Federal Reserve - are detrimental to Labor, whether Manual Labor or Management Labor, i.e., detrimental to both the working class and the middle class.
So far as I know, Professor Fekete is the first thinker to point out this particular consequence of an artificially and rapidly lowered interest rate.
The "Developed World" goes along with the Keynesian proposition of lowering interest rates drastically, to juice economies that are re-adjusting to previous juicing through credit expansion not based on previous accumulated savings. Accordingly, the slowest rates of increasing employment (if indeed there is any increase at all, since the statistics are universally doctored to look good and justify Central Bank intervention) are presented by the countries of the Developed World, which are suffering incredibly low rates of interest.
On the other hand, the "Emerging Markets" which have not applied QE and suppression of the interest rate so vigorously, are showing higher rates of employment than the "Developed World".
In a video on the Internet recently, viewers got a look at social conditions in Dhaka, the capital of Bangladesh. The number of humans is appalling. At the end of the period of fasting of Ramadan, incredible swarms of humans cram into the trains and climb up in hordes upon the roofs of the railroad cars.
The activity of boats on the massive river that goes through Dhaka is amazing; hundreds of boats are seen scampering over the river in constant activity.
There is no question of unemployment in Bangladesh, in spite of the fact that Dhaka is one of the most populated cities on the planet. Why? Because in Bangladesh, if you don't work, you don't eat. The economy of Bangladesh, left to itself, provides the maximum output possible for the massive population. Any intervention - and I do suppose they have some government intervention in their economy - must be minimal, because anything more than that would mean death for hundreds of thousands living at the very margin of sustainable life.
There is only one sort of economics in this world, because there is only one sort of human nature. Economics is simply one branch of the study of human nature: the study of the human being as an entity that acts, which is the same as saying that the human being chooses. Other species of living beings may exhibit a limited capacity for choosing, but the human being is entirely dependent on choosing - and making the right choices - for the sustenance of his life. The animal kingdom relies on instinct; the human being relies on his choices, which are not instinctive.
I mention this, because it appears that this fact escapes the high and mighty planners of national economies, known to us as "Keynesians".
When the planners proceed to lower interest rates in the economy, their decision affects not just some sectors, but all the people in one way or another.
Up to now, it has not been perceived that those who are most adversely affected are those who sell their work. Some of them will be manual workers, others will be better paid employees; some of them will lose their jobs as a result of rapidly lowered interest rates effected by the diktat of the Keynesian manipulators, and others will find that their wages do not increase, but either stagnate or even fall.
We must credit Professor Fekete for discovering the reason for this phenomenon.
Enterprises engage in production by combining Capital goods with Labor.
When the interest rate is forcibly lowered, the managements of enterprises receive a signal that tells them that Capital is abundant and suddenly much easier to acquire, by means of cheaper additional debt, than previously.
The manager examines his cash flow and makes a comparison between a) the amount of his cash flow that might go to acquiring additional Capital goods through debt, to apply in production, and b) the amount of his cash flow that goes to overall Labor costs. The cash flow that goes to Labor costs has not diminished, whereas the cash flow that could be applied to obtaining Capital goods through debt is now relatively smaller. Labor has become more expensive, relative to Capital goods obtainable through debt.
The entirely natural consequence of this comparison is that management will seek to reduce relatively more expensive Labor by taking on debt to acquire Capital goods to replace overall Labor costs. In other words, the "terms of trade" for manual laborers and employees are now set up against them.
The violent reduction of the interest rate has thus caused a set of responses by management that are adverse to Labor:
1. If laborers and employees can be substituted with Capital goods financed with ultra-low interest debt in order to automate the enterprise, the marginal laborers and employees will be laid off.
2. New enterprises that cannot command debt will be at a competitive disadvantage with larger enterprises which can take on debt and reduce costs by laying off some workers and employees. Small enterprises, the backbone of the economies of the Developed Countries, are adversely affected.
3. The relatively low cost of acquiring Capital goods, by means of taking on ultra-low interest-bearing debt, leads to the installation of enterprises massively capitalized with machinery; such enterprises employ few workers and employees. Modern auto manufacturing plants are an example.
4. Further, the relatively low cash flow required to finance the use of Capital goods, leads to the installation of enterprises massively capitalized with machinery to produce the technologically advanced Capital goods now in great demand, which will be used in other enterprises to lay off or reduce the need for manual labor: the technological boom is set off and robots and computer systematizations proliferate to the detriment of marginal manual labor and employees.
5. If we consider the work of the manual laborer and the ability of the employee as the "Capital" which they offer on the market, the return on their personal "Capital" has not been reduced; therefore, the wages which they obtained before the violent reduction of the interest rate can be sustained only precariously. They face either stagnant wages, or lower wages, or unemployment. The marginal worker and the marginal employee are laid off.
6. The middle class, which has worked to accumulate sufficient Capital on which to retire, now finds that the interest on their invested Capital is now insufficient to provide sustenance; the middle class goes into debt in an attempt to maintain their standard of living. The middle class delay their retirement and younger people do not find vacancies available.
7. With income for the mass of workers and the huge middle class stagnating, consumption must fall. The vision of Henry Ford was apt, when he said that he wanted his workers to have an income that would make them able to purchase the cars they manufactured. Stagnant wages and unemployment produce stagnant consumption. Empty shopping malls.
During the Industrial Revolution in England, the "Luddites" objected to the destruction of their jobs by newly-invented machinery. However, the reorganization of production along industrial lines eventually elevated the standard of living of the English by producing masses of much cheaper goods for the population. No greater advance in general prosperity has equaled that which took place in the 19th century and which was due to the use of machinery - Capital goods - in production. This was a natural development of the economies of the nations of the West.
The arbitrary and violent reduction of interest rates by the Keynesians in charge of the Central Banks of the West is no natural development. the arbitrary interventions of the Keynesians in reducing interest rates violently has acted to the great disadvantage of the class of people who must work for wages, whether manual laborers or employees.
Neither the Keynesian at the Central Banks, which carry out the policy of reducing the interest rate in order to stimulate their economies, nor the numerous critics of Zero Interest Rate Policy have been aware of the chain of causation between ZIRP and the plight of manual labor and employees.
Professor Fekete (see: has contributed importantly to Economics by pointing out the adverse effects of interest rate manipulation upon workers and employees.
The Formation of Interest Rate — 7 Nov 2014
Get Rea!: Bangladesh Brothel Secret — 27 Sep 2013
End of Ramadan rush-hour in Bangladesh — 8 Aug 2013
Would you still buy that dress after watching this? — 1 July 2013
Many property buyers are not aware that borrowing a huge sum of money in hundreds of thousands or millions to buy a house is in fact a high leverage investment. Because of record low interest rate at almost zero now, whoever is able to pay the 20% downpayment and service the monthly loan installment is considered affordable. None remembered that in the late 70's to early 80's, the interest rate ever spiked up to as high as 17%. I distinctly remembered the high interest rate then because my late mum was quite happy with 13% interest paid on her Fixed Deposit parked at one finance company in the mid-70's (1973 to 1977).
Wow...I thought 17% was already very high then...so the 30-Year Mortgage Rate in 1981 was @ 18.5%
A bond with a negative interest rate is a guaranteed money-loser. Why would you buy one if you can just hold cash instead? The traditional view has always been that no one would. People thought that the interest rate on bonds can't fall below zero because at that point people will just hold onto their money.
A regular reader recently raised a subject (on our Forum) which should be a frequent topic of discussion in our ultra-corrupt societies, but isn’t: usury. Everyone knows the meaning of the word: lending money at “excessive” or “exorbitant” rates of interest. Yet few of us ever contemplate its significance.
How do we define “usury”, in a world where our Big Banks (and the billionaires who own them) receive $trillions upon $trillions – every year – and all at “0% interest” (i.e. literally free money)? The way we quantify differentials in proportionate terms is through the function of multiplication. What does multiplication tell us about 0% interest and usury?
For the Big Banks who get all their own money at 0% interest; charging even 1% interest on the money they lend isn’t merely a much higher rate of interest (in multiplicative terms), it is an infinitely higher rate of interest. This reflects the simple fact of arithmetic that multiplying anything by zero equals zero, thus the (multiplicative) differential between 0% interest and 1% interest is infinity.
Critics will argue that mathematical analysis of this nature (somehow) “distorts” this conclusion about the absurd differential between those who get their money at 0% (i.e. for free), and those who don’t. But such criticism would fail to acknowledge the concept (of logic and morality) which is illustrated by this ultra-extreme mathematical differential.
One tiny, privileged class (the Big Banks, and the billionaires who own them) gets all its money for free. Everyone else does not. For the Privileged Class; obtaining their money (for free) is always a privilege and never a burden. For everyone else; obtaining their money is always a burden, and never a privilege.
This represents not merely an “advantage”, or even a large advantage for the Privileged Class. Rather, it reflects a fundamental act of discrimination, in arguably its most (economically) heinous form. One class is given, for free, something for which everyone else is required to pay (in the form of a real, non-fraudulent, rate of interest).
Revealed by the function of multiplication; there can be only two, possible remedies for this fundamental, systemic, economic discrimination. Either everyone must receive their money for free, or no one can be granted such a privilege. The fairness of this point of logic (and usury) is not merely elementary, it’s tautological.
It is through simply contemplating the implications of these two options that the inherent fraud of (so-called) “0% interest” becomes painfully obvious. What would happen in a world where we woke-up one morning and discovered that everyone could “borrow money” at 0% interest?
Every “Average Joe” and “Average Jane” would immediately march to the nearest available bank, and start borrowing (who would need to show up for work?). Would they “borrow” a million dollars – at 0%? Of course not. Would they borrow a billion dollars? Why stop there?
If Average Joe and Average Jane could “borrow” like the Big Banks (i.e. get as much money as they wanted, for free, whenever they wanted), then that is exactly what they would do. The day after everyone was allowed to “borrow” for free, our money-supply would be a number which would look something like this (we don’t have a word for it):
…as everyone began “plans” for construction of their own Castle in the Sky. And by Day 3 (at the very, very latest); no one would accept this funny-money – as by then it would be crystal-clear to everyone that all this paper was totally worthless.
Conceptually, this (extreme) example will come as a shock to many readers, to the point where many will reject the obvious logic here as being contrived. It isn’t. It just illustrates a simple principle of arithmetic: anything available for free, and in infinite supply must be worthless.
Suppose that tomorrow one of our insane/corrupt governments decreed that it would start to use grains of sand as its “money” (instead of coloured scraps of paper). Some enterprising individual would immediately take a back-hoe to the nearest beach and start “harvesting money”, which he/she would then use to buy everything.
Obviously if grains of sand were “money”; it would be worthless money, because no one would accept it for payment, in spite of that government’s “fiat”. But if grains of sand would be an obviously/irredeemably worthless currency; then what about “dollars”? Most are now fabricated electronically, with nothing more than a mouse-click.
If even government decree would not/could not bestow “value” on grains of sand (because it was free, and available in near-infinite quantities), then how can it bestow any value on electronic currency – created for free, and in near-infinite quantities? The obvious answer is that it cannot.
The mere (fraudulent) act by which our corrupt central banks give $trillions and $trillions and $trillions to the Big Banks for free automatically renders these currencies economically/mathematically/logically worthless. Thus we see that the extreme, multiplicative differential with which we began our analysis is “revealing” in yet another respect.
When the Big Banks get all their own money at “0% interest” (for free), while everyone else pays (literally) infinitely higher rates of interest; this is not merely fundamentally unfair, it is fundamentally fraudulent. So-called “0% loans” are prima facie fraudulent transactions, since (as our analysis reveals), “borrowing” money for free is inherently illegitimate, from any and every perspective.
The official “0% interest rate” of the U.S. government (and all the near-zero rates across the fraudulent West) establish two, fundamental principles – in mathematical, economic, and logically irrefutable terms.
As long as the Big Banks get their own money at 0%; any rate of interest which they charge (to their victims) is “usury”, in its most extreme/heinous form.
Because the Big Banks are getting their money for free; all our Western currencies have been rendered worthless.
Our entire monetary and financial systems are merely frauds and shams, of unparalleled dimensions. The paper currencies issued by our corrupt central banks are irredeemably worthless. Worse still; the ludicrous notion that government “fiat” can give these worthless, paper currencies value has been revealed to be just as ephemeral as grains of sand – in a hurricane.
Five hundred years ago; the Dutch were convinced that tulips (actually tulip bulbs) were an ideal currency, to the point where they based their entire economy on the tulip. “Everyone” believed this to be a sound, rational basis upon which to operate a monetary system (and economy)…until the day when “everyone” realized (simultaneously) that they were wrong.
In hindsight; it was obviously a ridiculous basis for a monetary system, in large part because there was no mechanism to limit supply. But at least it was an honest system.
Five hundred years later; our governments now operate a monetary system every bit as ridiculous as “Tulipmania” in Holland: cranking-out scraps of coloured paper, for free, in near-infinite quantities, and pretending that all this paper is “money”. The difference is that unlike the Dutch tulip-economy; our system of (worthless) paper currencies is both inherently/extremely unfair and fundamentally fraudulent.
For those people just becoming aware, today, that our entire economies are based upon a massive, unsustainable fraud, and that all of our (paper) currencies are already worthless (in fundamental terms); fortunately there is still time to protect yourselves. Take your (unofficially) worthless paper – which will soon be officially worthless – and swap it for honest money: gold and silver.
This is one scenario where the cliché “better late than never” does not apply. Those members of the Dutch population who swapped their tulip bulbs for hard assets the day before the collapse of Tulipmania suffered relatively little economic harm. Those who did not were destroyed.
If you borrow any money today (or have borrowed any money, at any time in the past 6+ years); you are a victim of the rapacious usury of the Big Banks. However, if you continue to hold your (dwindling) wealth in the form of these fraudulent/worthless paper currencies; you will soon be a victim of a much bigger crime – by the same cabal of Big Banks.