by Paul Craig Roberts
Jun 19, 2017
The Federal Reserve building in Washington, DC
Why do "democratic
have central banks that do
except protect big banks at the
of the people?
Several years ago when
the Federal Reserve had its 'FED
funds rate' at zero to 25 basis points (one-quarter of one percent -
0.25%), there was a great deal of talk, somehow presented as urgent,
whether the Federal Reserve would raise interest rates.
RT asked me if the FED was going to raise interest rates.
I answered that the
purpose of low interest rates was to restore the solvency of the
balance sheets of the "banks too big to fail" by raising debt
The lower the
interest rate, the higher the prices of debt instruments.
The FED drives bond
prices up by purchasing bonds, and the FED raises interest rates by
selling bonds, or by purchasing fewer of them than previously.
I told RT that a real increase in interest rates would undercut the
Fed's policy of rescuing the balance sheets of the big banks whose
balance sheets were loaded up with bad debt that desperately needed
a rise in debt prices for the banks to remain solvent.
When shortly thereafter the FED raised the overnight funds rate, it
blew my credibility with RT.
RT did not understand
that real interest rates had not increased. Indeed, two days after
the "rate increase" the nominal interest rate had not changed. It
was still 18 basis points.
The announced rate had
gone from the old range of zero to 25 basis points to a new range of
25 basis points to 50 basis points. The former max was the current
Moreover, over the long time period in which there was such well
marketed concern over whether such an inconsequential interest rate
rise would occur, inflation had risen, making the real interest rate
negative well below the 18 basis points official interest rate.
By the time the FED
raised the nominal rate, the real rate was already more negative.
Thus, there was no rise
in real interest rates.
The financial press did not explain this, either from incompetence
or collusion. RT accepted the fake news as reality and wrote off my
credibility. I am often interviewed by RT, but no longer on economic
matters, about which I know the most.
A couple of days ago, after a long period of waiting for another
interest rate rise, an announcement from the FED, amidst further
indication of US economic decline, announced another 25 basis point
increase in the target range for the FED funds rate.
Inflation aside, in fact interest rates declined, as my sometime
co-author Dave Kranzler
Despite this publicized "rise" of the FED funds rate, the 10-year
interest rate on Treasuries,
"has declined 30
basis points this year. Thus for certain borrowers, the FED has
effectively lowered the cost of borrowing."
Kranzler goes on to point
"the spread between
the 30-day Treasury Bill and the 10-yr Treasury has declined
this year from 193 basis points to 125 basis points - a 68 basis
point drop in the cost of funding for borrowers who have access
to the highly engineered derivative products that enable these
borrowers to take advantage of the shape of the yield curve in
order to lower their cost of borrowing."
Kranzler provides a chart
that shows that the spread between the 30-day Treasury bill and the
10-year Treasury bond is narrowing.
As the short-term rate
rises, the long term rate is falling, and the spread between the
long and short rate has declined 68 basis points from almost two
percentage points to one and one quarter percentage point.
Clearly, this is not a rise in interest rates.
Clearly also, a rise in the FED funds rate no longer signals a rise
in all interest rates.
Why is the FED
raising short rates when the long rates are falling?
"democratic Western democracies" have central banks that do
nothing except protect big banks at the expense of the
How long will the
insouciant peoples of the West continue to conspire in their