USURY’S ADVANCE: Why Raising the Interest Rate Will only Exacerbate Inflation, Unemployment &…
This week it was reported that the Bank of England was on the brink of implementing its highest interest rate increase in 27 years, the reasoning behind it being that of fighting inflation. It would be the first half-point hike since it was made independent from the British government in 1997. U.K. inflation hit a new 40-year high of 9.4% in June as food and energy prices continued to soar, deepening the country’s historic cost-of-living crisis. The ING wouldn’t rule out an additional 25bps or at most 50bps worth of hikes. This more aggressive approach would bring the Bank’s monetary tightening trajectory closer to the trend set by the U.S. Federal Reserve and the European Central Bank, which implemented 75 and 50 (0.75% and 0.50%) basis point hikes last month, respectively. The most recent rate increase by the Federal Reserve is already its fourth hike of such so far this year.
What, however, is the logic provided by these institutions in declaring these changes? How does this rate increase affect the rest of the financial world, influencing credit and the price system? Quite simply, this measure is openly utilised to reduce aggregate demand in the economy. This aim has also been the focus of governments, so that demand can be reduced to match ‘restricted supply.’ The process and how it achieves this can be explained in the following paragraph.
Banks create money out of thin air in the form of loans, simply by typing up numbers in a customer’s account. They can ‘destroy’ money just as easily by the same process. This financial capital is something which Karl Marx referred to as ‘fictitious capital.’ However, central bank legislation in most countries require banks to meet a regulatory solvency requirement by also holding physical money notes (inherently worthless, but physically representative of this also inherently worthless medium of exchange which we call money) in asset reserves to prevent insolvency in the case of a ‘bank run’ (in which all customers rush to withdraw money, seen in the previous financial crises of the 1930s and 2010s). Each bank has its own deposit account of physical cash with the central bank. When banks need to borrow physical money to replenish those reserves, they look to other banks that have reserve accounts with the Fed and that may be in a surplus — and just as with any other loan, the banks are charged an interest rate, too. It is this percentage, known as the federal funds rate, that the Federal Reserve helps determine.The central bank charges this fee of interest (usury) for access to these reserves, again created itself by the central bank. Banks then pass on the cost of a higher federal funds rate to their customers when those customers want to access regular lending products.
One example of this fee being passed on to consumers is that of the prime rate. This is the interest rate banks charge their ‘most creditworthy’ borrowers, such as large corporations. For several decades now, the rule of thumb has been that the prime rate is equivalent to the federal funds rate plus 3%. So, with the new federal funds target rate at between 2.25% and 2.5%, the new prime rate at the upper range would be at 5.5%. The percentage difference is supposed to cover the cost of processing a bank loan. Changes in the prime rate, in turn, drive up the cost of borrowing for all other loan products, such as real estate and vehicle purchases, as well as revolving debt such as credit cards.
As this so-called ‘theory’ asserts, if it’s more expensive to borrow money or carry a balance on a credit card, consumers will spend less. When spending declines, demand will fall and, eventually, so will the price of everyday goods. However, this assertion is wrong for several reasons. Not only do these measures purposely engineer economic stagnation, it seeks to alter the wrong side of the supply-demand relationship. The real problem is not that demand is too high, but that supply is too low. The high prices have been caused mainly by two present ills — supply chain shocks and often linked development of profiteering. We recently learned, for example, that Bord Gáis, a state body, recorded operating profits of a record 74%, despite an increase in input costs caused by the present energy supply shortage.
The real purpose of this increase in interest is to substitute the percentage of a consumers’ income that is spent on real goods with the payment of interest fees (it is now accepted that mortgages will become more expensive). It will not replace ‘real’ demand, and as higher interest rates dampen commercial lending, the supply chain will be reduced further. This only results in a further increase in inflation.
Most leaders in banking would have you think that we lived in a market economy. While they often espouse the principles of competition and general free-market thinking, the truth is not the case. Why is it that these prophets of free-marketeerism regard the closing down of a local SME (on which we depend for employment and economics growth) as part-and-parcel of ‘the rules of the game,’ when these same prophets seek public bailouts from private wrongs? The truth is that we do not live in a ‘market’ economy (whether capitalist or socialist), but, instead, an economy of oligopoly finance capitalism, which resembles the dictatorships of fascism and communism. As Samir Amin of the Monthly Review explains; “the power of oligopoly-finance capital is such that it enters into competition with and counterposes its own interests to the state — the collective representative of capital and manager of the hegemonic social bloc. It is this hegemonic social bloc under the direction of the state that ensures capital valuation and accumulation… The oligopoly is not governed by the laws of “competition” but by a mix of competition and oligopolistic agreements — often called “consensus” — which is itself unstable in the sense that a moment dominated by consensus (such as ours) may be followed by a moment of ferocious competition… The quasi-monopoly that this represents has enabled high finance to take control of the globalised financial market, dispossessing the finance ministries and central banks from their function as authorities able to determine interest rates by their own decision.”
The last sentence quoted is one of particular note. Finance’s cries for market ‘deregulation’ and independence of the state results in the government’s abdication of control of the market to the interests of high-finance, which is what we are now seeing the result of in the present moment. These institutions have successfully lobbied for central bank independence of the state, and complete separation of the state from control of money, which is the system in place in most countries today.
Let’s take the USA, for example. We hear an awful lot in the news about the bitter conflict surrounding the Second Amendment (gun ownership) of that country’s constitution — but, when was the last time you heard about the Section Eight of Article 1 of the U.S constitution? You have most likely never heard of this one, or what it contains. It is written that Congress possesses the power to coin, issue and regulate the power of money. This is a section of great significance. Not only does it allow for state control of money issuance, but gives the democratically elected parliament the direct power to do so. This means that the United States could create debt-free credit to any household, new and existing businesses, infrastructure (such as health-care, facilities, education), wage-subsidies and social supports, eliminate debt, and establish perpetual prosperity. However, it chooses not to, as that function is currently outsourced to the Federal Reserve, which is independent of any state or parliament. This is the same in all countries today.
One important fact resulting from the historical development of money is that the creation of wealth — the production of goods and services necessary to maintain a decent standard of living and essential for the progress of a civilisation — has come to be carried out by entirely separate entities to those involved in the creation of money — necessary to consume the wealth produced. We ought, in this instance to note that the economy is the system we have put in place to create and distribute value (wealth). All wealth is created by labour. For example, think about a farmer who produces corn, eggs, and milk. A miller adds value to the corn by producing flour. A dairy adds value to the milk by producing butter. Lastly, a baker adds value to the flour, eggs and butter by producing a cake. The cake is more valuable than the corn eggs and milk that went into it. This is another form of value creation.
As the economist and journalist, Mark E. Thomas notes; “the value that has been created is shared between the participants in the value creation process: the farmer receives income for the corn, eggs and milk; the dairy pays for the milk and receives income for the butter; the miller pays for the corn and receives income from the flour; the baker pays for the flour, eggs and butter, and receives income from the cake. In this way, a chain of activities carried out by a series of different participants has created the value of the cake and distributed that value among themselves. This is a system of value creation and distribution.”
In contrast, money is simply a medium of exchange. Contrary to popular belief, it is inherently worthless. Major Clifford Hugh Douglas, one of the most influential economic theorists of the 20th century, believed that those who create money (i.e banks) “have no connection to the production of wealth at all, not even its custodian.” Douglas compares this unnatural division between finance and production to the equally unnatural situation in a railway industry, if the ticket office were managed by an entirely different organisation to the one providing the trains, the stations, etc., therefore, a bank, resembling a ticket office, should not be responsible for determining productive capacity. This implies that the bank has no right to decide the qualifications of producers or the conditions under which they produce, as the ticket office “has no valid right to any voice in deciding either the qualifications of travellers, or the conditions under which they travel.” However, that is exactly what is happening right now.
Money is supposed to be nothing more than a means of exchanging goods and services, as contradistinguished to bartering two commodities e.g mutton and dairy milk. However, money, as we have previously established, is not a commodity. It is simply a digital entry typed up on a computer. Its purpose is to act in a manner akin to a train ticket, so that, metaphorically speaking, goods and services can board the trains and arrive at the appropriate destination. Economics, as a social science, places great emphasis on its concerns in relation to co-ordination, which is what makes this issue a matter worthy of central attention. The fact that banks do not operate like ticket offices is sufficient proof for Douglas of the systemic fraud involved in modern banking.
Inflation is presently a side-effect of insufficient supply, yet we possess more than enough productive capacity to meet demand. Unemployment, the waste of assets, and social misery are the direct result of the lack of money tokens available for productive purposes, all intentionally engineered by the interests of financiers. This same problem, which lay behind the Great Depression of the 1930s, is what caused the phrase “poverty in the amidst of plenty” to be coined by the reforming advocates of that period. We should be aware of the fact that while people are free to elect a county council or national parliament, there exists a financial dictatorship which shackles governments and the general will of the democratic electors.
The crux of the problem lies with the very financial system which possesses the control of the design and implementation of its so-called ‘solutions.’ The appropriate remedies cannot be applied until the mass of the people demand change (and rightly so). Until the state assumes its rightful control of the issuance and allocation of the money tokens, a just social order and the deliverance of happiness and prosperity will never be realised. This can be accomplished in the eurozone by an innovative system created by the Nobel prize winning economist, Joseph E. Stiglitz. This system proposed by Stiglitz is what he calls the ‘flexible euro.’ States would have much more direct control of both money creation internally and their current account balances externally. He advocates market-based mechanisms for both. Every country, he argues, should be permitted to use its own electronic euro. Irish euros could then trade at fluctuating prices against German euros, restoring the flexibility afforded by a national currency. “Credit auctions” would demand that private banks pay for the right to expand the money supply, and “trade chits” would force importers to effectively buy trade-able licences to import (limiting price fluctuations of national euros). This would be a radical move towards greater state control of the economy, allowing for unprecedented investment in the production and provision of public services, housing, social supports, employment, incomes and entrepreneurship. Implementing changes in finance will be the only way that we can overcome dread and despair. Only by achieving this change can true democracy be implemented, and the will of the people can be realised.
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