“The American public is ready for someone to tell them the truth. They are ready for someone who will explain to them the consequences, for themselves and their children, if we continue to violate these basic economic principles.”
The IMF is a world organization, funded by member nations, whose purpose is to provide financial aid and assistance to developing countries. The IMF is one member of the troika deciding whether or not to advance further monies to Greece. Why would the IMF ask the U.S. government not to increase interest rates? The answer is because the dollar is not only the world’s reserve currency, it is its primary currency. Third world debt has been growing at an alarming rate. Investment bankers have been structuring junk bonds to finance the deficits of third world governments generated by government operations. These junk bonds are denominated in dollars and issued to allow third world countries to accumulate debt at cheap interest rates. A rise in world interest rates, in reference to the dollar, could literally bankrupt many third world countries. The amount of exposure is estimated to be between $7 and $8 trillion.
The goal of the IMF and World Bank is to facilitate world economic growth at a rate greater than the annual deficits produced by third world countries. In other words, economic growth as a percent increase year over year would exceed the amount of a deficit produced in a year as a percent of economic growth. Under such a scenario, it would be possible in theory for nations to grow economically at a rate to be able to pay down debt. For this policy to work, interest rates must be kept low. The fallacy in this theory is this — It is impossible to have economic growth without cost of capital. As an economy grows, interest rates must rise. The return on capital is the interest paid as rent on that capital. No nation, no company, no individual can have free money forever without cost.
The average cost of capital to the United States Treasury since 1871 has been 4.2%. That is the optimum rate that monetary policy is trying to “hit” when it uses all the tools of monetary policy. It is important to have some interest paid on capital, or the bond market becomes so distorted that only equities are a sound investment. We are at that point today in the financial markets. The accumulated U.S. debt today is approximately $18 trillion. If the Federal Reserve were to allow the cost of capital to rise to the optimum of 4.2%, it would increase over time the cost of interest paid on the debt to $720 billion. Such an amount would further add to the deficits of the budget and increase the accumulated debt, setting in motion a downward spiral of debt to GDP from which the government could not escape. The Federal Reserve now finds itself in the position of implementing policy to keep interest rates low rather than implementing policy to grow the economy. It is in a Catch 22.
The United States, being the world’s largest economy controlling the world’s primary and reserve currency, and a very sophisticated banking system, can in fact acquire and accumulate debt for the foreseeable future, but not forever. Third world countries that have been raising operating funds through junk bond financing, are much more vulnerable and sensitive to the rise in interest rates. This is why the IMF petitioned our Treasury and Federal Reserve not to raise interest rates.
The Federal Reserve was established for the purpose of managing the supply of money to support the U.S. economy. It was given certain tools to achieve its purpose to keep inflation down and growth constant. Debt and ongoing deficits of the United States government are caused by Congress. The President must provide leadership to produce and submit a budget to the American people that respects economic principles for a sound and stable society. The Congressional debate on ongoing resolutions, the debt ceiling, shutting down government, obligations to states, and unfunded mandates are all shallow when debated outside the context of overriding economic principles critical to our country.
The American public is ready for someone to tell them the truth. They are ready for someone who will explain to them the consequences, for themselves and their children, if we continue to violate these basic economic principles. And they are ready for someone to lead them by presenting a vision that is attainable. Through joint and shared sacrifice, commitment, and a hope for the next generation, the Catch 22 can be avoided.
The American public is ready to follow someone who is committed to them and to their legacy for the next generation. The American public is ready to hear the truth. The American public is ready to follow principled leadership.
My name is Marc Nuttle and this is what I believe.
What do you believe?