Send this article to a friend:

June
20
2017

Democracy Is A Front For Central Bank Rule
Paul Craig Roberts

Several years ago when the Federal Reserve had its Fed funds rate at zero to 25 basis points (one-quarter of one percent—0.25%), there was a great deal of talk, somehow presented as urgent, whether the Federal Reserve would raise interest rates.

RT asked me if the Fed was going to raise interest rates. I answered that the purpose of low interest rates was to restore the solvency of the balance sheets of the “banks too big to fail” by raising debt prices. The lower the interest rate, the higher the prices of debt instruments. The Fed drives bond prices up by purchasing bonds, and the Fed raises interest rates by selling bonds, or by purchasing fewer of them than previously.

I told RT that a real increase in interest rates would undercut the Fed’s policy of rescuing the balance sheets of the big banks whose balance sheets were loaded up with bad debt that desperately needed a rise in debt prices for the banks to remain solvent.

When shortly thereafter the Fed raised the overnight funds rate, it blew my credibility with RT. RT did not understand that real interest rates had not increased. Indeed, two days after the “rate increase” the nominal interest rate had not changed. It was still 18 basis points. The announced rate had gone from the old range of zero to 25 basis points to a new range of 25 basis points to 50 basis points. The former max was the current minimum.

Moreover, over the long time period in which there was such well marketed concern over whether such an inconsequential interest rate rise would occur, inflation had risen, making the real interest rate negative well below the 18 basis points official interest rate. By the time the Fed raised the nominal rate, the real rate was already more negative. Thus, there was no rise in real interest rates.

The financial press did not explain this, either from incompetence or collusion. RT accepted the fake news as reality and wrote off my credibility. I am often interviewed by RT, but no longer on economic matters, about which I know the most.

A couple of days ago, after a long period of waiting for another interest rate rise, an announcement from the Fed, amidst further indication of US economic decline, announced another 25 basis point increase in the target range for the Fed funds rate.

Inflation aside, in fact interest rates declined, as my sometime co-author Dave Kranzler reports. http://investmentresearchdynamics.com/has-the-fed-actually-raised-rates-this-year/
Despite this publicized “rise” of the Fed funds rate, the 10-year interest rate on Treasuries “has declined 30 basis points this year. Thus for certain borrowers, the Fed has effectively lowered the cost of borowing.”

Kranzler goes on to point out that “the spread between the 30-day Treasury Bill and the 10-yr Treasury has declined this year from 193 basis points to 125 basis points – a 68 basis point drop in the cost of funding for borrowers who have access to the highly engineered derivative products that enable these borrowers to take advantage of the shape of the yield curve in order to lower their cost of borrowing.”

Kranzler provides a chart that shows that the spread between the 30-day Treasury bill and the 10-year Treasury bond is narrowing. As the short-term rate rises, the long term rate is falling, and the spread between the long and short rate has declined 68 basis points from almost two percentage points to one and one quarter percentage point.

Clearly, this is not a rise in interest rates.

Clearly also, a rise in the Fed funds rate no longer signals a rise in all interest rates.

Why is the Fed raising short rates when the long rates are falling?

Why do “democratic Western democracies” have central banks that do nothing except protect big banks at the expense of the people?

How long will the insouciant peoples of the West continue to conspire in their own demise?

Hon. Paul Craig Roberts is the John M. Olin Fellow at the Institute for Political Economy, Senior Research Fellow at the Hoover Institution, Stanford University, and Research Fellow at the Independent Institute. A former editor and columnist for The Wall Street Journal and columnist for Business Week and the Scripps Howard News Service, he is a nationally syndicated columnist for Creators Syndicate in Los Angeles and a columnist for Investor's Business Daily. In 1992 he received the Warren Brookes Award for Excellence in Journalism. In 1993 the Forbes Media Guide ranked him as one of the top seven journalists.

He was Distinguished Fellow at the Cato Institute from 1993 to 1996. From 1982 through 1993, he held the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies. During 1981-82 he served as Assistant Secretary of the Treasury for Economic Policy. President Reagan and Treasury Secretary Regan credited him with a major role in the Economic Recovery Tax Act of 1981, and he was awarded the Treasury Department's Meritorious Service Award for "his outstanding contributions to the formulation of United States economic policy." From 1975 to 1978, Dr. Roberts served on the congressional staff where he drafted the Kemp-Roth bill and played a leading role in developing bipartisan support for a supply-side economic policy.

In 1987 the French government recognized him as "the artisan of a renewal in economic science and policy after half a century of state interventionism" and inducted him into the Legion of Honor.

Dr. Roberts' latest books are The Tyranny of Good Intentions, co-authored with IPE Fellow Lawrence Stratton, and published by Prima Publishing in May 2000, and Chile: Two Visions - The Allende-Pinochet Era, co-authored with IPE Fellow Karen Araujo, and published in Spanish by Universidad Nacional Andres Bello in Santiago, Chile, in November 2000. The Capitalist Revolution in Latin America, co-authored with IPE Fellow Karen LaFollette Araujo, was published by Oxford University Press in 1997. A Spanish language edition was published by Oxford in 1999. The New Colorline: How Quotas and Privilege Destroy Democracy, co-authored with Lawrence Stratton, was published by Regnery in 1995. A paperback edition was published in 1997. Meltdown: Inside the Soviet Economy, co-authored with Karen LaFollette, was published by the Cato Institute in 1990. Harvard University Press published his book, The Supply-Side Revolution, in 1984. Widely reviewed and favorably received, the book was praised by Forbes as "a timely masterpiece that will have real impact on economic thinking in the years ahead." Dr. Roberts is the author of Alienation and the Soviet Economy, published in 1971 and republished in 1990. He is the author of Marx's Theory of Exchange, Alienation and Crisis, published in 1973 and republished in 1983. A Spanish language edition was published in 1974.

Dr. Roberts has held numerous academic appointments. He has contributed chapters to numerous books and has published many articles in journals of scholarship, including the Journal of Political Economy, Oxford Economic Papers, Journal of Law and Economics, Studies in Banking and Finance, Journal of Monetary Economics, Public Finance Quarterly, Public Choice, Classica et Mediaevalia, Ethics, Slavic Review, Soviet Studies, Rivista de Political Economica, and Zeitschrift fur Wirtschafspolitik. He has entries in the McGraw-Hill Encyclopedia of Economics and the New Palgrave Dictionary of Money and Finance. He has contributed to Commentary, The Public Interest, The National Interest, Harper's, the New York Times, The Washington Post, The Los Angeles Times, Fortune, London Times, The Financial Times, TLS, The Spectator, Il Sole 24 Ore, Le Figaro, Liberation, and the Nihon Keizai Shimbun. He has testified before committees of Congress on 30 occasions.

Dr. Roberts was educated at the Georgia Institute of Technology (B.S.), the University of Virginia (Ph.D.), the University of California at Berkeley and Oxford University where he was a member of Merton College.

He is listed in Who's Who in America, Who's Who in the World, The Dictionary of International Biography, Outstanding People of the Twentieth Century, and 1000 Leaders of World Influence. His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press. He can be reached at: [email protected]

Please Donate

I listen to my readers. In March 2010, I terminated my syndicated column. Thousands of you protested. So persuasive were your emails asking me to reconsider and to continue writing that, two months later, I began writing again.

In order to create a coherent uncensored and unedited archive of my writings, The Institute For Political Economy, a non-profit organization that supports research, writing and books, has established this site, thus gratifying readers' demands that I continue to provide analyses of events in our time.

In order to stay up, this site needs to pay for itself.

www.paulcraigroberts.org