Interest rates at 20% in the USA

By Gerry Brady | Blog

Mar 10

Central bankers used to be the “inflation fighters” back in the good old days of the 1960’s, 70’s and 80’s. Just like a team of well coordinated fire fighters dressed in fire protection suits and helmets battling an out-of-control enemy, they launched raids on rising CPI inflation by raising interest rates over and over again, dousing economic growth that had gotten too far ahead of itself.

Paul Volcker is hailed as the genius who killed inflation way back in 1980. He was the head of the US Federal Reserve then and Chief Inflation Fighter. He took brave action and raised the federal reserve official interest rate to 20 % in March 1980. He then lowered it. And then he pushed it up again to 20 % in December of that year. And he kept it above 16 % until May 1981. That is an extraordinary fact. Think about it. Interest rates of 20 % (and much more in the banking sector). You will likely never see such events again unless for some unknown and unlikely reason, the US Dollar collapses sometime in the future and needs to be rescued.

The economic world changed irrevocably in 1980. That was Peak CPI Inflation in the advanced economies — the absolute top of an Everest of inflation. The trend has been downward ever since but no one told the central bankers of the advanced economies. They still think that their chief job is to control the CPI inflation threat when there is none. Forty years later, they still listen and look (endlessly) for fires that just won’t start.

Lately, they have switched to the dark side and have become fire lighters — inflation stirrers. They are now DESPERATE to create some inflation, thinking that they can move their economies back to “normal”. But the previous days of “normal” simply won’t return. 1980 is long gone and it was certainly not a normal situation.

The reasons are complex but they boil down to demographics, cheap petrochemical energy, technological and social change. The world of conventional, mainstream economics simply sees demographics, human behavior and energy as subjects that are below them in their lofty ivory towers of academia where they have built themselves micro-economic empires based upon a whole series of false assumptions and supportive mathematics. 

The European Central Bank (ECB) has finally capitulated and admitted that European economic growth has stalled badly and is showing signs of further decline. They announced yet another TLTRO last week — that is a Targeted Longer Term Refinancing Operation.

From the ECB’s website — “Targeted longer-term refinancing operations (TLTROs) are one of the ECB’s non-standard monetary policy tools. Through TLTROs we provide long-term loans to banks and offer them an incentive to increase their lending to businesses and consumers in the euro area. This helps to return inflation rates to levels below, but close to 2% over the medium term. The first TLTRO series was launched in 2014. The second one, introduced in March 2016, is called TLTRO-II.”

They call it “liquidity” and “stimulation” but those are just cute words for cheap money being thrown at the banking sector in the desperate hope that they will be able to find willing borrowers for fresh new loans. The ECB has actually been doing this since 2008. They used to call them LTRO’s but the last two in 2014 and 2016 were called TLTRO’s. Go figure.

March 2008 – The ECB offered the European commercial banks an LTRO with a six-month maturity. 177 banks applied.

June 2009 – The ECB offered its first 12-month LTRO. 1,000 banks applied.

December 2011 – The ECB offered its first LTRO with a three-year term.

February 2012 – The ECB offered another LTRO that provided 800 Eurozone banks with 529.5 billion euros in low interest loans.

Then they changed the name of such loan largesse to TLTRO’s, presumably to boost confidence that they were doing something new.

Mario Draghi is the Italian who is President of the ECB. Let’s deconstruct Mario’s comments from last week when announcing these fresh new loans aimed at “stimulating” credit creation by the commercial banks. Mario’s words are in bold.

“Underlying inflation continues to be muted. The weaker economic momentum is slowing the adjustment of inflation towards our aim.” — Translation: It’s not our fault. Don’t blame us. Yes, we have failed to light the fire of economic growth and CPI inflation that we promised. And yes, we thought that our policies were realistic but we now realize that we have been deluded. But other causes of unexpected weaker economic momentum are to blame, not us.

“Today’s decisions will support the further build-up of domestic price pressures and headline inflation developments over the medium term.” Translation: We cannot openly admit that we were deluded and wrong in our assessment of the prospects for inflation so we will continue to just hope and pray that CPI inflation will somehow magically appear after we hand more money to the banking sector to see if they can find some more borrowers.

“In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.” Translation: We now know how dire the situation really is and we will do anything to rescue it including changing all of our current policies. So go back to sleep. We have it under our skillful control. The ship is moving back on course.


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