Interest Rates and Employment

0:00I'm going to talk about interest rates and jobs, because we hear in the news every day that as long as the Federal Reserve can lower interest rates, we're going to have more employment, right? You hear that each and every day. So I want to talk a little bit about interest rates and how it relates to jobs. Now, consumers and entrepreneurs often speak about the cost of money when referring to interest rates. In fact, modern lenders, of which I used to be, we would call loan, the interest that we would charge would be loan pricing, in fact.

0:45So viewed in this way, you can think that interest rates are like any other good. The cheaper the good, the more affordable it is. And if the central bank can lower interest rates as much as possible, then they can essentially turn scarcity into prosperity, right? They'd be modern-day alchemists, if you will. But the problem is right now is the low interest rates that engendered the boom that we had, the boom in housing, the boom in stocks, the boom in commercial real estate, commodities. There's still a deleveraging going on. There's still bad loans out there to be liquidated.

1:35And so that's working against this lowering of interest rates. But central bankers are to Deter. They continue in their faith, in their ancient tradition, that if they can just lower interest rates low enough, then they can re-stimulate the economy. And if the patient, being the economy, doesn't respond, that just means they haven't given them enough medicine. They haven't lowered interest rates low enough. And that's what we constantly hear. In fact, a year ago when the Fed announced that it was going to do quantitative easing In 2002, otherwise known as QE2, they were going to buy 600 billion dollars worth of government debt with money created out of nowhere off the Federal Reserve balance sheet.

2:26The Associated Press wrote the idea of QE2 was for cheaper loans to get people to spend more and then stimulate hiring. And that's what the thought was, if you could just get interest rates low enough. So let's look at what interest rates have been in the last three years. Since December of 08, the Fed funds rate, which is the interest rate that the Fed controls, has been zero, zero to 25 basis points. Basis point being a hundredth of a percentage. So zero to a quarter interest has been, or quarter percent interest, has been the interest rate that the Fed has dictated. They can't go any lower than that, by the way. They'd like to go negative. They'd like to have negative interest rates, but we'll get into that. Now at the end of 2008, let's see what the interest rate's been on the 10-year bond. At the end In 2008, the interest on 10-year bond was 3.92%. Today, it's 2.94%. So 10-year money has come down 100 basis points. Now, how about 1-year money? Back in 2008, 1-year money was 1.44%. That's pretty low. Today, 17 basis points. That's 0.17%. Now, the prime lending rate is really what most people

3:56If you're an entrepreneur, if you're a consumer, a lot of times you're lending off prime. And the bank prime rate was slashed to 4% in October of 2008. That was right around the financial crash. It was slashed to 4%. Less than a year before that, the prime rate A year before that, the prime rate had been eight and a quarter percent. So you saw those interest rates come way down and prime rate has actually come down from there to three and a quarter percent and has been there ever since. So you have an extraordinarily low prime rate that we've had for the last three years of three and a quarter percent.

4:42Thirty-year mortgages, another rate that a lot of people follow and are very interested in, end of October of 08, 6.87 for a 30-year mortgage if you're going to get a home loan. Last week, 4.49, 200 basis points less. So rates have been extraordinarily low for three years. But what are the banks doing? So the idea, remember, was you lower rates, people borrow money, they start hiring, right? Well, the banks aren't lending the money and the borrowers aren't borrowing it. The first quarter of this year, loans were down $126 billion in the banking system.

5:27That was a drop of about 2% and that was the largest drop in bank lending in the 28 years that those figures have been kept. So despite these low rates that have been pushed down by the central bank, banks aren't lending the money. And while the interest rates have fallen, unemployment has actually risen. In October of 2008, the unemployment rate was 6.1 percent. What is it today? It's over 9 percent. It's been as high as 10, but it lingers at about 9 percent. And if you count discouraged workers, if you count workers that have to work part-time because they can't find a full-time job, that number is actually 15% and if you follow John Williams at shadowstats.com who actually tracks unemployment the way it used to be calculated, the unemployment rate is actually over 20%. So we have a lot of people unemployed still. The other thing we have a lot of people on is something called SNAP. I don't know if you guys have heard of SNAP, but you may

6:38What used to be food stamps is now SNAP, the Supplemental Nutrition Assistance Program.

6:48The government likes acronyms, don't it? You guys probably run into a few acronyms in your business. So we have 44 million people in the United States on SNAP. That is an all That is an all-time record. It grows by double digits each and every month. So if you go back to the original premise that if you cut rates, bankers will lend, people will be hired, it's all falling apart. In fact, this rate cutting hasn't stabilized anything other than dependence on the government. And at the same time, While the folks at the Bureau of Labor Statistics, those are the people that keep inflation stats, they say that price inflation is running about 3.57%. Now, that's high enough in itself.

7:41But again, John Williams, who calculates CPI the way it used to be before all these hedonic adjustments during the Boskin Commission back in the mid and late 90s, he says that consumer The government prices are actually rising at 11% and I think anybody that has to go shop for groceries, gas, insurance, anything like that will agree that prices continue to go up even though the government says it's not going up. So what we have is we have all this money, all this government stimulus but no growth and no jobs to show for it. We only have high prices even though the government says we don't have any high prices. So, why is this? I mean the Keynesians, when I say, Mark is going to talk about Keynesian economics I assume in the next section here, but the Keynesians view is that you can manage the economy through central bank engineering and they are undeterred in their belief that that these low rates will put people back to work, it will solve all of America's economic

8:57woes or whatever country you may be in. And the reason is Keynes believed that the rate of interest is, quote, the reward for parting with liquidity for a specific period. He believed it was a measure of the unwillingness of those who possess money to part with their And he actually believed that those who hold cash for speculative money to be wicked, and it was up to central bankers to stop this evil.

9:42Keynes thought that money would be barren as a store of wealth while investments yielded Returns. In fact, he wrote, quote, why should anyone outside a lunatic asylum use, wish to use money as a store of wealth? Now imagine that. I mean, that's what Keynes is saying is when you put your money in a savings account, you don't buy stocks, you don't buy bonds, you're just holding it, he thinks that you should be in an insane asylum if you're doing Net and Keynesians are the ones who are controlling monetary policy in Washington. Now liquidity preference by the way determine the rate of interest rates. Rates by the way would be lowest during the recovery and at the peak of booms, that's when confidence would be high and everyone would be seeking to trade their liquidity for investments and things.

10:38Actually, as Harry Hazlitt writes, it's precisely in the recovery and at the peak of the boom that short-term interest rates are highest. Now what do the Keynesians leave out? What the Keynesians leave out is time. They leave that out of their calculus. While lenders may think they're lending money, they're actually lending time. Present goods are more valuable than future goods. by Time. Hazlitt reminds us, Henry Hazlitt reminds us that the old word for interest used to be usury. You probably are all familiar with the term usury and it has a very negative connotation of very high interest rates, usury laws that are put in place in some states where you can't charge interest over a certain amount, but actually that word is very descriptive Ludwig von Mises explains that people do not save and accumulate because there is interest.

12:01is neither the impetus to saving nor the reward or compensation granted for abstaining from immediate consumption. It is the ratio in mutual valuation of present goods as against future goods. So, if I ask everybody in this room, I said, would you rather have, bless you, would you rather have fifty dollars today or fifty dollars in a year? What would you Today. Right? It's easy. Now, if I said you could have $50 today or $70 in a year, what would you say? It depends. In fact, there's about 50 of you in here. I might get 50 different answers, right? I might get 5 different answers. I might get 10 different answers, but who knows? And everybody's discounting of the present rate, The rate of this money is going to be different depending on their circumstances.

13:03And yours may change from one day to the next if you got a bill due or stumbled onto a girl at the bar or whatever the case may be. So it's important to realize that the collective time preference is not something that the monetary authorities know when they're setting interest rates. They can't know what the collective 50 opinions are for present valuing, even in this room, let alone the entire country, let alone an economy. It's determined subjectively by the actions of millions of market participants. And this is out of the reach of the monetary authorities.

13:49And that's why whenever they set interest rates, they always get it wrong. Whatever they do will not fix the economy. It's impossible for them to know what the proper interest rate should be. When they dictate interest rates by command and control, they bear no relation to the time preference that you guys, or anybody in the economy, any economic actors, display. So, what they can do is only cause distortions and chaos. Now, F. A. Hayek, you may have heard that name, you may not, but he won the Nobel Prize in 1974. He was an Austrian and he said that monetary and fiscal policies by central bankers are the product of what he called the scientistic attitude which is in fact unscientific in and that it involves a mechanical and uncritical application of habits of thought to fields different than those in which they are being formed.

15:00In other words, this works great, dictating interest rates, dictating policy, if you're in a laboratory. But when you have actors, millions and millions, billions of actors who are engaged in subjective Transactions, subjective valuations, different time preferences for each individual, different time preferences each and every day. There is no way that these interest rates can dictate what will happen with an economy. Now James Grant, who writes a wonderful publication A wonderful publication called Grant's Interest Rate Observer. He wrote recently, the trouble with living authorities and money and banking is the ideas they absorbed in school.

15:53For instance, that a central bank can calibrate the rate of displacement of currency at print by adjusting the speed of the digital press. Or that the federal open market committee can pick the interest rate that will cause allows the GDP to grow and payrolls to swell and prices to levitate at 2% per annum, give or take a basis point. Such things are simply impossible. So while the Fed thinks it can print money, and that means more employment, they can print money but they don't know what's going to, essentially going to happen. Right now we We have a clearing of malinvestments that were created by the Fed's low interest rates during the boom, the stock market boom, the dot-com boom, the real estate boom.

16:47And while those malinvestments are being cleared, it makes no sense to lower rates so that people want to buy the very things that need to be cleared from the market. There's no sense propping up home prices. There's no sense propping up the price of cars with cash for clunkers and those kind of things. Those malinvestments need to be cleared. The fact is that those pushing the monetary buttons for the Federal Reserve are just naive in believing they can steer the economy by setting interest rates. So that's why when you read in the paper that they've lowered interest rates, they're We're going to keep them low indefinitely to spur employment and it's not working is the reason is that that money, instead of rushing into productive activities, gets misdirected into speculation, into malinvestments.

17:51So what do we have? We have unemployment at 9%, 15%, 20%, depends on the number you choose. We have 44 million people on food stamps and growing. You have businesses going out of business everywhere. But then Washington seems to be doing okay, right? Real estate in fact even is good in Washington. Wall Street seems to be doing okay. And that's who gets the money first and that's who is benefiting by these low rates. It's not the guy on Main Street that's borrowing from his local bank to create jobs. It's the guys on Wall Street borrowing at 0% and speculating in derivatives or stocks or whatever instrument they choose.

18:44So what we have is low interest rates are not going to increase employment. They're just going to increase chaos, distortions, and speculation. And if you like the current economy, it's my view that you're going to like it for a long, long time. Because we are stuck with this for quite some time.