How Can Lower Interest Rates Be Appropriate?

By Destina @ Adobe Stock

At David Stockman’s Contra Corner, David Stockman asks how lower interest rates can be appropriate, given the burden of $100 trillion in U.S. public and private debt. He writes:

Here is the result of the Fed’s misbegotten pro-inflation policy since it officially adopted its 2.00% target in January 2012. According to our trusty 16% trimmed mean CPI, the price level is up by +41% since then, and was still rising at a 3.31% annual rate in July, as per this week’s CPI release.

Accordingly, given that any dollar earned or saved in 2012 is worth just 70 cents today, the question recurs: Why in the world should the Fed even be thinking of opening up the money spigot and thereby exposing wage earners and savers to a further prolongation of the purchasing power theft evident in the graph below?

And that’s to say nothing of another flare-up like the recent brutal inflation surge, which at its 7% peak was depreciating the dollar’s purchasing power by 50% every nine years.

There is only one real reason for a new round of rate cuts, which is now virtually guaranteed to commence next month. To wit, Wall Street has repeatedly threatened to stage a hissy fit if the Fed doesn’t soon pleasure traders and speculators with a renewed dose of cheap carry trade credit and even higher PE multiples than the extreme valuations already embedded in the stock market.

Of course, the Fed heads would not openly admit to something this craven. So its Wall Street patsies beat the tom-toms for rate cuts, claiming that they are for the benefit the average household and are necessary to prevent the main street economy from tipping over into the scourge of recession or worse.

But with the US economy now burdened with nearly $100 trillion of public and private debt, how in the world could lower interest rates be even remotely appropriate? After all, a central bank-induced reduction in interest rates is designed to cause households, businesses and government to pile even more debt on top of their already tottering debt-entombed balance sheets.

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