Negative real interest rates are politics

Published by the R Street Institute.

In a recent Wall Street Journal piece, Jason Zweig cites Harvard’s Carmen Reinhart as rightly pointing out that “low interest rates will keep transferring massive amounts of wealth from savers to borrowers.” In fact, short-term interest rates are not merely “low,” but in real, inflation-adjusted terms, they are negative.

The negative real interest rates imposed by the Federal Reserve for more than seven years now have, indeed, expropriated savings and subsidized borrowings. In particular, they have subsidized leveraged speculation, providing essentially free margin loans to the speculators at the expense of the savers. As a temporary crisis measure in a financial panic, one can defend this. But not for more than seven years.

A cynical description of politics is taking money from the public and giving it to your friends. In simple fact, when you use the power of the government to take money from some people and give it to others, that is absolutely politics, no matter what else it might also be called. For example, it might also be called “monetary policy.” By imposing negative real interest rates, the Fed is without question engaging in political decisions and political actions.

The average real yield on six-month Treasury bills since the end of 2008 has been negative 1.3 percent. The 50-year historical average is about positive 1.6 percent. The difference goes right out of the pockets of the savers and into the pockets of borrowers. Of course, the biggest borrower of all, which gets by far the biggest transfer of money, is the federal government itself. In this sense, negative interest rates are another way of imposing a tax. Imposing a tax is obviously a political act.

Where does the Fed get the legitimacy to impose taxes and to take some people’s money and give it to others, for years after the crisis has ended?  How and to whom is it accountable for these political acts?

Where, how and to whom, indeed?