Treasury Bill rates have recently fallen to zero percent, but few Americans understand that since September 2008 this has happened 46 times, and about 3 percent of all U.S. government debt under one year in maturity has been sold without paying any interest during the last 7 years.
Laurence B. Siegel and Thomas S. Coleman, writing for the ValueWalk blog, argue that ultra-low interest rates are good for investors in the short term, because they create asset bubbles in stocks, bonds and real estate. But they are bad for everyone else, because ultra-low interest rates distort the economy.
Siegel and Coleman call zero percent interest rates an “insidious tax” that transfers wealth from lenders to borrowers, distorting incentives and misallocating capital for individuals and government, and making American investors poorer over time.
“Zero interest rates–which translate to negative real interest rates after inflation–are a massive transfer of wealth from investors to governments and other borrowers around the world.” They estimate that the U.S. Federal Reserve’s unjustifiably low interest rates are currently causing nearly $1 trillion per year in wealth transfer from the public.
Siegel and Coleman refer to the classic 1973 study by economists Ronald McKinnon and Edward Shaw in 1973, who analyzed the post-World War II period and described how the Fed had used its powers to engage in “financial repression” to keep interest rates low. Although inflation was rising fast, hurting businesses and strangling seniors on fixed income, the Fed justified keeping interest rates from rising over recession fears.
The economists warned the U.S. was at risk of entering “stagflation” and estimated that America’s Misery Index, which equals the combined unemployment and inflation rates, would rise to record highs. Over the next 7 years, the Misery Rate more than doubled from 8.87 percent to 20.76 percent in President Jimmy Carter’s last year in office.
Having been humiliated and seen as dangerous after the 1970’s stagflation, the Fed stayed away from trying to use ultra-low interest rates to stimulate the economy until the start of the recent global financial crisis. Since September 2008, the Fed’s financial repression policies have helped the U.S. Treasury issued $1.7 trillion in short term government paper that pay zero percent interest.
There are substantial numbers of large banks and brokerage firms that are required to post collateral in the form of highly liquid T-Bills. But with Congress unwilling to raise the debt ceiling, the supply of T-Bills has dried up. This has recently allowed the Treasury to sell a series of debt issues into the public markets at zero percent of interest.
When the global financial crisis hit, the Fed said that expanding its balance sheet and pushing interest rates to almost zero and buying government bonds would only be a temporary solution. But it is seven years later and the Fed continues to advocate for ultra-low interest rates.
The financial repression of the 1970s eventually caused stagflation and doubled the misery index. The current financial repression policies of the Fed caused stocks to almost triple, and real estate to gain back all its post-global financial crisis values.
If inflation starts rising, America could be in for another 1970s-style bout of stagflation.