If the so-called economy is “booming” according the corporate propaganda apparatus, why can’t the privately-controlled Federal Reserve Bank raise the federal funds rate above 3 percent? The answer is that the asset bubbles in stocks, bonds and real estate would immediately implode if the federal funds rate were to got to 4 percent, and that is 2 percent less than the normal fed funds rate of 6 percent.
The Fed attempted to gently increase the federal funds rate in 2018 with the stated intention of raising them four consecutive times in 2019. The result was one of the worst Decembers in the history of the American stock market. Instead of raising, the Fed has cut three times this year.
That the funds rate is headed to zero means we’re approaching the ultimate stress test for the global credit system. How does a system based on debt survive sustained nominal negative interest rates? In such a hypothetical scenario that will become all too real sometime in the next couple of years, cash under the mattress will generate a better real return than treasuries will. But the enormous asset bubble is sustained by credit, the credit is sustained by treasury debt, and the treasuries are sustained by providing a better return than cash. If cash provides investors a higher return than treasuries, investors will pull cash out of the system.
When a dollar is pulled out of the system, the total nominal value of the asset bubble declines by much more than one dollar. When that dollar was in the credit system, it was booked as an asset on the balance sheets of several institutions. I give the dollar to the branch bank, the branch bank gives it to an investment bank, the investment bank gives it to another investment bank, that investment bank gives it to a private company, that private company gives it to a supplier, that supplier gives it to a fund manager, that fund manager… at this point that single dollar is now counted as an asset by me, the branch bank, the two investment banks, the private company, the supplier, and the fund manager, even though there’s just one actual physical dollar in play.
If I’m not even going to get that dollar back when I withdraw my deposit from the branch bank, though, I won’t deposit the dollar in the first place. I’ll keep it under my mattress. I’m small potatoes, but the investment banks–and their clients–are not. For awhile, the investment banks will be able to put friendly pressure on their clients to make deposits with nominal negative returns, but that is not indefinitely viable.
However the situation resolves, the trifecta of free money, perpetual asset growth, and low inflation is coming to an end.