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Congressman Ron Paul says that “central
bankers are intellectually bankrupt”. This is
actually the title of an excellent op-ed article he wrote last week for
London’s Financial Times in which he clearly explains that
controlling interest rates is a form of price fixing. We know from monetary
history that price fixing has always been harmful to economic activity. Yet
“control of the world’s economy has been placed in the hands of a
banking cartel” even “while socialism and centralised
economic planning have largely been rejected by free-market
economists”.
It is an excellent article, and I highly recommend it. But I do want
to comment on one point.
Congressman Paul accurately explains how artificially low interest
rates engineered by central banks have distorted economy activity. Yet by
saying that “These interventions are intended to raise stock prices,
lower borrowing costs for companies and individuals, and maintain high
housing prices”, Congressman Paul misses what I believe to be the most
important reason central banks are keeping interest rates abnormally low. It
is because governments around the world cannot afford to pay a true rate of
interest.
They have taken on too much debt. They are over-leveraged, and
interest expense payments on their debt has become one of the largest
components of their outlays, even at these abnormally low interest rates
engineered by central banks. Thus, if governments paid a fair interest rate
that reflected the real monetary and credit risks, they would quickly go
bankrupt.
For example, the US government now owes $15.6 trillion. If interest
rates on that debt rose just 1%, its annual interest expense would rise by
$156 billion, which is 6.8% of annual revenue. If we assume 6% is a fair rate
of interest on its debt – which no longer is triple-A rated – to
reflect the risk, its annual interest expense would be 40% of its revenue,
which is a rate that we know from monetary history
is unsustainable. Would you buy the bonds of a company paying 40% of its
sales revenue just to service interest on its debt – and not any
principal?
Of course not, which explains why central bankers
have fixed interest rates at artificially low levels. If they
didn’t, the fiat currency bubble would pop, ending the big governments
made possible by seemingly unlimited spending. Central bankers and their
paper money would be swept onto the garbage heap.
So central bankers are intellectually bankrupt, but they know enough to
understand how their bread is buttered. Rather than letting interest rates
rise to a normal level, their only aim is to keep the fiat currency game
going, and thereby perpetuate their existence.
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