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My paper “Amidst Bullish Hoopla: A Behind the Curtain Look at Fed Desperation and Intervention Wizardry,” as well as sources cited in my “Learning the score” article, make it clear that long term interest rates are being kept artificially low by the Fed. Let us think for a moment what interest rates might be if set by a free market. Over the past few years the money supply has been growing by about 10% a year. Historically long term interest rates have been at least as high as the rate of money supply growth (which tends to correspond with the inflation rate). On top of this, investors have historically added about 2-3% over the rate of inflation as their real expected rate of return. So now we are up to around a 12% interest rate. On top of this, investors, typically penalize countries that live beyond their means by adding on at least another 2-3% to compensate for additional risks. With growing total personal, corporate, and government debt at over three times GDP and growing balance of trade deficits currently over 5% of GDP, the US economy is increasingly beginning to look like that of a banana republic. So now we are up to a potential “free market” long term mortgage rate of around 14-15%. Relative to this, current 30 year mortgages under 6% may constitute a kind of perverse “gift” from the Fed.

I believe that eventually the free market will take over, and that it is likely that never again in my lifetime will I see long term interest rates this low again in the U.S. I use the word “perverse” when describing the Fed’s “gift” because my views on the character of the Fed and its impact on America are very similar to those of credit system analyst Doug Noland, Congressman Ron Paul and Mises Institute President and libertarian commentator Lew Rockwell. (Please note the Mises Institute video “Money, Banking, and the Federal Reserve” which features the latter two aforementioned individuals). Fed interventions are ultimately financed by forms of monetary and credit inflation. Inflation is ultimately a sneaky form of taxation on the American people. Despite all the financial manipulation by the Fed and US Government and spin doctoring by the national media, in the long run in economics there is are no free lunches. Nothing of enduring value is ever created out of thin air. Take whatever “gift” the Fed will give to you now, because much more is being taken out of your hide in more subtle ways both today and further down the road.

Artificially low mortgage rates are a tiny silver lining of benefit for people who can refinance their homes in what is otherwise a very unfortunate and very serious overall national financial situation. Reducing your interest rate costs is smart. I do not, however, encourage individuals to use their homes as ATM machines, take out home equity loans, and decrease their home equity. I believe that we are headed towards a very serious recessionary economic crisis, and individuals should be battening down the hatches and trying to find better ways to fortify their current sources of income and reduce their vulnerability to indebtedness and potential bankruptcy in every way possible.




Flag carried by the 3rd Maryland Regiment at the Battle of Cowpens, S. Carolina, 1781

© William Fox. Sometimes William Fox offers viewpoints that are not necessarily his own to provide additional perspectives.