Idaho's Weekly Journal of Local & National Commentary Week 2815


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by Free Market Duck

The Fed’s “Prime Interest Rate” Joke
(Nov 16, 2007)

The concept of “interest rates” in economics is defined as a higher value of present goods relative to future goods, or a higher valuation of current money as against future money.  Since today’s money is not a hard commodity (i.e. not gold) and today’s paper money is not redeemable in, or backed 100% by, gold or any other commodity, AND the Federal Reserve central bankers can, and do, pump trillions and trillions of non-backed paper money and credit into the economy any time they want, the concept of the “Prime Interest Rate” has been completely destroyed and is no longer meaningful in the U.S. economy.

Boise, ID – Listen up, girl friends.  Here’s something I know you asked yourself in the shower this morning, “Hey, what’s the real definition of the ‘Prime Interest Rate’ and why is everybody bouncing around from left foot to right foot waiting for Federal Reserve Chairman Ben Bernanke to announce on national TV whether he is going to lower the ‘Prime Interest Rate’ by 0.5% today?”

   Good question, Margie.  The answer is:

   The concept of “interest rates” in economics is defined as a higher value of present goods relative to future goods, or a higher valuation of current money as against future money. – Econ Prof Ludwig von Mises

   In street talk, 5% interest is defined as:  I will give you 105 bushels of corn tomorrow if you give me 100 bushels of corn today.  Or, for gold money, 5% interest means:  I will give you 105 troy oz of gold tomorrow if you give me 100 troy oz of gold today.  Or, for paper money backed totally by gold, 5% interest means:  I will give you 105 gold certificates tomorrow if you give me 100 gold certificates today.  “Interest rate” is defined as a ratio between anticipated service rendered today relative to anticipated service rendered tomorrow.  The borrower anticipates that he is better off by obtaining current goods (including commodity money such as gold) to put to work today vs. the amount he has to repay in the future.  So he borrows the goods (or gold money) and agrees to repay at 5% interest.  In our example, the math is ((105 – 100)/100) * 100% = 5% interest.

   Fine and dandy, now we all know the classical economics definition of “interest rate.”

   But today we have a problem.  The classical definition of “interest rate” for borrowing money has been violated and, therefore, the equation for “interest rate” is not valid.  Why?

   Today’s money is not gold or any other commodity and paper money is not backed by gold or any other commodity.  What’s worse is that today’s paper money supply can be expanded or contracted at will by a group of central bankers called The Federal Reserve because it is only paper.  This begs the question:  how does one define or calculate “interest rate” if part of the equation, the anticipated value of tomorrow’s money, can be inflated or deflated like a rubber band by the Federal Reserve?

   When money was gold, the borrower could reasonably ascertain the current quantity and the future quantity and thus calculate the ratio called “interest rate.”  If somebody, say a counterfeiter, can rapidly expand or contract the future supply of paper money and credit, then nobody can ascertain what the “interest rate” might be nor the effects on the economy.  In fact, even the people who expand or contract the money supply cannot reasonably anticipate the “interest rate” because "interest rate" is a qualitative evaluation by businessmen and other borrowers in anticipation of service rendered today vs. tomorrow.

   The point is, as soon as a nation goes off the gold standard and manipulates the money supply, the concept of “interest rate” becomes meaningless because nobody can anticipate the value of expanding future money relative to today’s money -- except the central bankers whose goal is simply to obtain free monopoly money by printing it up for themselves and their member banks.  That's why the Fed central bankers abhor a gold standard; they can't expand or contract gold.

   Not only is it meaningless for the Federal Reserve to show up on national TV and announce a new “Prime Interest Rate,” their stated purpose for raising or lowering the "Prime Rate" is to increase or decrease the money supply.  But this is absurd because the Fed already increases and decreases the money supply in between raising and lowering the so-called "Prime Interest Rate."  In fact, if the Fed just pumped, say, $50 trillion into the economy by funding the subprime slime for their member banks, they have already, de facto, changed the “Prime Interest Rate” by that very action.

   What is really going on is that the Fed is pretending that it is operating in a free market economy with real commodity money and thus the classical concept of "interest rates" can be evaluated by businessmen.  This “pretend economics” is simply an extension of pretending that today's paper money has value by virtue of the fact that it was printed by the U.S. Treasury.

   But today's paper money is not gold and the concept of "interest rates" is not applicable to irredeemable currency.  The concept of “interest rates” in a free market paradigm cannot simply be transferred to a fiat currency paradigm; the two are incompatible.  It is sheer nonsense for “Helicopter Ben” Bernanke to strut around every Quarter and announce the latest increase or decrease in the “Prime Interest Rate.”  It’s as bad as pretending that the Federal Reserve Note is backed by gold.

   The only way to increase true production in an economy is to increase time and labor-saving devices or services and thus increase the amount of capital or capital goods.  Wealth comes from ideas, not fake paper money.  Increasing the money supply or lowering the "Prime Interest Rate" is not a substitute for increasing true capital and savings.  As econ Prof von Mises has stated:

   “It is certain that no manipulation of the banks can provide the economic system with capital goods.  What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media.  The credit expansion boom is built on the sands of banknotes and deposits.  It must collapse.”

   What you are witnessing today is the collapse of what's left of America's free market economy through continual manipulation of our "pretend" paper money and a "pretend Prime Interest Rate."  We are already in a huge recession and the Federal Reserve is leading America and the global economy into a global depression.

   The monetary cabal will get rich along the way, however, and the way they did it this time around can best be described in the following:

   In essence, the U.S. banking system is simply a legalized pipeline, a conduit, or vehicle to launder the Federal Reserve’s counterfeiting of the central bankers’ hyper-inflated non-backed paper money and credit.  It was not the subprime slime’s “interest rate” on which the central bankers wanted to make their profits.  It was the 3200% leveraged margin money that the bankers received from the Federal Reserve – 97-cents for every 3-cent fractional reserve requirement – which was “bundled” with the subprime slime mortgage loans and sold to investment suckers (or willing conspirators) throughout the U.S. investment community and abroad.  That’s how the bankers made their billions of dollars, not from the subprime interest rates per se.

   First, the bankers made hundreds of billions of dollars in “profits” by bundling the subprime loans with free Fed money, and now they get to write off half of that as losses to curtail their taxes.  What a clever scheme.  Even if their subsidiaries go bankrupt, as planned, they still cleaned up during the loan and bundling process.

   Never mind the subprime borrowers, they were just suckers in the game.  It is the member banks of the Federal Reserve and their subsidiaries on Wall Street, the investment and bond rating companies, who raked in a fortune.  Check Forbe's latest Fortune 400 Billionaires.  25% came from Wall Street.  If they were smart, and they are smart, they will have already traded their fake commercial paper including Federal Reserve Notes, CDOs, derivatives, and SIVs for hard commodities such as real estate, corporations, precious metals such as gold – what irony -- and other commodities before the music stops.  And guess what?  The music hasn’t stopped yet.  So what’s in your savings?  If it’s paper not backed by a hard commodity, you’re sunk.  If it’s a hard commodity, you stand a chance.

   Meanwhile, Congress hasn’t got a clue.  Neither do 99% of all the stock market pundits babbling about the “Prime Interest Rate” on national TV.  They have no clue that the definition of the “Prime Interest Rate” is now meaningless except as a vehicle by which the Federal Reserve can continually inject hyperinflated paper and credit into an already hyperinflated market.

   What tangled webs the money changers weave in their perpetual manipulation of the money supply.  And not one person in a million understands the true nature of money and credit. -- FM Duck

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