Tags: federal reserve | interest rates | cost of borrowing | bank loan

George Mentz: The Fed, Artificial Inflation & the Disparate Treatment of Borrowers

loans, bank terms

George Mentz By Tuesday, 22 February 2022 04:52 PM EST Current | Bio | Archive

In the coming few weeks and months, the Federal Reserve plans to raise interest rates four or more times despite the better judgment of many U.S. entrepreneurs. The strangest anomaly to this governmental economic intervention is the new theory that raising Fed interest rates may actually artificially increase inflation.

With increased lending rates, the Fed will increase the cost of housing, the cost of investing, the cost of automobiles and equipment, and the cost of student loans by hiking rates. Raising rates could boost the price of food and drink while lifting the cost of your cell phone and Internet use. Higher rates would typically increase your automobile-loan payments and the cost of borrowing money to fund domestic and global economic activities of small business and large U.S. companies.

Modern Federal Reserve Inflationary Theory

This theory is called the MFRIT Modern Federal Reserve Inflationary Theory.

It may be time to go beyond MMT Modern Monetary Theory and encourage The White House or Congress to change the rules of the game. If the Fed is going to artificially boost costs and inflation in the United States, then the president needs to take executive action that would lower the impact for working families, small businesses, and those who make this country actually function on a daily basis. After seeing the rate hikes and the market crash of 2000 of 10 trillion dollars of wealth being lost, there needs to be a new strategy.

How would you do this? The president could provide strategic relief to those who actually produce taxable income and small U.S. businesses, which are the heart of Main Street's economic activity. The way that the government could stimulate the economy in spite of the “Fed rate hikes” is to maintain and create targeted-lower interest rates for student loans, mortgages, family auto purchases, consumer credit cards, and to maintain lower interest rates for first-time home buyers, or those who need to refinance a home loan that meet certain conditions.

The White House could create ways to lower interest rates on those who need to buy an automobile for work, so they can go to a job and actually produce income for the government to tax. The nasty truth is that higher lending rates by the Fed is similar to adding a discriminatory tariff or tax on U.S. citizens.

Overall, the Administration needs to take action to maintain low inflation on the movement of money, the movement of people, and the movement of products and services. Unfortunately, the Fed's unwise acts of raising rates would increase the prices on products, services, the movement of money, and the movement of people, which, in fact, makes this country less productive and gets people laid off from jobs.

US vs. 180 Worldwide Economies

There could also be ways that the Department of Treasury, the SBA and other governmental agencies could make low rate lending available for those citizens who who want to invest in the U.S.A. Because the U.S. competes against over 180 nations worldwide, raising interest rates above what other countries are charging, puts the U.S. workers at a disadvantage. Many of other nations artificially control their currency value, stimulate investment into their domestic companies, and artificially print free money for their people to borrow to stimulate the sale of products and services that they export.

Thus, the Federal Reserve could create an unfair playing field for the United States with higher lending rates. Further, the Fed could contribute to stock market uncertainty by reducing liquidity. Further, when the Fed raises rates, dividend yielding companies have less money to pay out to shareholders which may also hurt fixed income dependent retirees and recipients.

The reality of the situation is this: We're living in a new paradigm. This is not 1998 or 1999, when rates went up to slow down the internet boom during the Clinton administration where eventually we had the worst stock crash in recent history. &

Similarly, every time the Fed raises lending rates, the cost of interest on our debt and the cost of running the U.S. government goes up dramatically thus reducing available money to spend on infrastructure and salaries of government employees.

High interest rates can facilitate a market correction because it slows down borrowing and the movement of money, and it slows down investment. It also reduces liquidity in the markets by raising margin loan rates which are used by investors.

The reality is there are more than 43 million people with student loans. There are millions of people with margin investment loans and millions of people with small business loans.

There are millions of working families with credit card debt and raising interest rates is not going to help any of these people. Sadly, the raising of interest rates on working families may quickly evaporate the disposable income of the average American consumer or taxpayer.

Here are 10 market forces affected by the Fed 's actions. Many of these points below were not significant in the 1980s before credit cards and student loans became a part of millions of family budgets.

  1. Mortgage Rates: Mortgage rates are low right now. However, in 2018 they were the highest in almost 9 years, moving from 3.99 % this to about 5% for a 30 year loan. Housing sales will probably slow especially if inflation continues, and 401(K)s may take a hit in 2022 which are used by many homebuyers.
  2. Student Debt: 43 million Americans will pay higher monthly bills on their federal student debt with the new high rate. In 2016, the rate was 3.76%-5.31%, in 2017 the rate was 4.45%-6.00%, and the new rate after three rate increases in 2018 is 5.05%-6.60%. COVID freezes on loan payments are now ending.
  3. Corporate Debt: US Corporations which hold $11 trillion in debt will pay higher debt loads affecting profits and sustainability.
  4. Margin debt in the securities markets could be as high as 900 billion in the USA, and the rates may be as high as 8.325% , which is similar to the rates in 1999 as the big internet crash began. If the Fed raises rates, less people can effectively use margin loans. People actually borrow against stock all of the time to finance autos, home improvement and even expenses.
  5. Government Debt Payments: The U.S. government and state governments will cost much more to run because they will owe another 1 or 2% per year on the trillions of existing debt. 1% of 25 trillion adds another 250 billion to our budget each year.
  6. Global Investor Confidence: Sovereign investors from Japan, China, Russia, Singapore, Germany, and other super rich states may pull out of the U.S. market due to obvious risks.
  7. Institutional Investor Behavior: Goldman Sachs information shows spending intentions are down substantially already this year. Goldman Sachs' overall IT spending index declined to 60.5 in December from 67 last June and an all-time high of 85.5 in December 2017.
  8. Credit Card Debt: The average credit card holder in the U.S. had $5,668 in credit card debt in Q2 2021. Total credit card debt has reached its highest point ever, surpassing $1 trillion in 2017, according to a separate report by the Federal Reserve. Credit card interest rates have been rising, and the average rate is now 16.2% on interest-bearing accounts.
  9. Federal Reserve Narrow View: The Federal Reserve is independent but most of its members only have limited data with an urban viewpoint. Fed Governors may be overlooking the economic well being of the majority of Americans who do not reside in corporate and heavily subsidized cities such as New York, Chicago, Washington D.C. and San Francisco.
  10. Auto Loans - In 2017, there were 108.66 million car loan accounts opened by Americans. Most of these loans are floating rates directly affected by Fed Policy.

So, with higher interest rates and the higher cost of fuel at this point in time, the Fed may create artificial inflation and a situation where the market can go into deep sustained correction for the next few years.

If U.S. policymakers are not careful, other countries around the world can lend at lower rates than the U.S. and continue to stimulate their economies through smart lending and smart exporting. Thus, all other countries could facility growing economies while the U.S. goes into the recession and stagnation. Sadly, the interest rate hikes may now have a “disparate impact” or unintentional discrimination on middle class and working families in the 21st Century. Hopefully, the Federal Reserve will find solutions to this problem.

Remember, the U.S. doesn't need to have the greatest fiscal policy in the world; however, the U.S. must have a smarter and more agile policy than its global rivals.
George Mentz JD MBA CILS is a CWM Chartered Wealth Manager ®, global speaker - educator, tax-economist, international lawyer and CEO of the GAFM Global Academy of Finance & Management ®. The GAFM is an ESQ EU accredited graduate body that offers certification training in 150+ nations under ISO 21001 and ISO 9001 standards. Mentz is also an award winning author and graduate law professor of wealth management in the USA.

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In the coming few weeks and months, the Federal Reserve plans to raise interest rates four or more times despite the better judgment of many U.S. entrepreneurs. This will result in a new paradigm for those with outstanding loans.
federal reserve, interest rates, cost of borrowing, bank loan
Tuesday, 22 February 2022 04:52 PM
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