In a capitalist system, capital comes from savings, not the government. Governments don’t invest in anything; they take
Low Interest Rates and Redistribution of Wealth
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“Redistribution of wealth” has become a popular phrase in conservative circles lately. One way of looking at it might be through the lens of monetary policy. Governments around the world often weaken and strengthen their currencies due to trade imbalances, geopolitical environment, and the like. Brazil has implemented capital controls in recent years to tamp down the flow of “hot money” into its economy in an attempt to stave off inflation, while the Swiss National Bank has put a lid on the franc to quell deflation fears. The Canadian people should pay close attention to their central bank, so that they don’t fall victim to what we in America are going through.
The federal government is not redistributing wealth through classic tax-and-spend measures that we’re so accustomed to; they’re doing it through stealth Keynesian economics, i.e. monetary policy. While fringe groups like Ron Paul supporters have been shunned by the mainstream media, the evidence is starting to pile up. Some leading money managers have spoken out about this, including Universa Investments Chief Investment Officer Mark Spitznagel. “A major issue in this year’s presidential campaign is the growing disparity between rich and poor, the 1% versus the 99%,” he wrote in a Wall Street Journal Op-ed piece entitled “How the Fed Favors the 1%.”
When the Federal Reserve keeps interest rates low for such a long period of time, savers lose out. If somebody has $100,000 in money markets, bank savings, or CD’s, they’re essentially getting zero return. Add to that the ensuing currency de-valuation (inflation), and people are losing by saving. The elderly are disproportionately hurt by this, since senior citizens who rely on fixed income can’t jump into stocks to juice returns. The government is punishing savers.
America was built on savings and investment
America was built on savings and investment. In a capitalist system, capital comes from savings, not the government. Governments don’t invest in anything; they take. When President Obama talks about “investing” in infrastructure, telecommunications and renewable energy, he’s talking about taking from the private sector, which can’t build capital reserves because of his policies. He’s in effect taking monopoly money from the Treasury and handing it out to favored industries. This is why the $787 billion American Recovery and Reinvestment Act did so much harm.
The 2009 ARRA, or “the stimulus,” was a psychological blow to the credit markets. It scared investment capital away. This legislation was America’s way of telling the world, “Sorry world, we don’t need your investment dollars. We’ll print our own and dole them out to Solyndra.” Crony capitalism results in the misallocation of capital, and the same goes with low interest rates.
A true free-market economy means that everything is unaffected by government—including interest rates. There is a market for interest rates. If a bank on one corner is lending at 4%, the bank across the street should be able to offer 3.75%. Another bank might offer 3.9%, but have better service than the others. This is how free-markets work in banking. Because of the Federal Reserve, though, this is not the case. We have one large central bank suppressing the interest rate market, which confuses investors.
Investment dollars cannot go to work until they are first joined together. Perpetually low interest rates inhibits saving, which stifles real investment (private investment). The person who has $100,000 in the bank is in effect a lender, but is not rewarded for his efforts. With the depletion of America’s savings in the last decade, there is no foundation for investment. Low interest rates impede capital formation. “Near zero interest rates penalize savers and channel artificially cheap capital to government, big corporations and foreign countries,” says former Reagan deputy treasurer David Malpass (which is essentially why we have such low economic growth).
The Fed is transferring immense wealth from the middle-class to the most affluent, from the least privileged to the most privileged
“The Fed doesn’t expand the money supply by uniformly dropping cash from helicopters over the hapless masses. Rather, it directs capital transfers to the largest banks, minimizes their borrowing costs, and lowers their reserve requirements. All of these actions result in immediate handouts to the financial elite first,” adds Spitznagel. “The Fed is transferring immense wealth from the middle-class to the most affluent, from the least privileged to the most privileged.”
You have to hand it to Mark Spitznagel. He is one of the “elite and affluent,” yet he cares about the country enough to tell the unpleasant truth about the Fed. Spitznagel has the guts to say what the other hedge fund and private equity managers won’t – that the Federal Reserve is complicit in the “redistribution of wealth” that is now taking place in America.