Near-Zero Interest

Interest in economic expansion is so low, interest rates are nearly zero. Rates have been low for a long time and Bernanke says the Fed will continue its "accommodative" monetary policy.

An accommodative policy is absolutely essential for averting a depressionary trend. It is a risk-averse assessment that, as previously discussed, is not necessarily pro-growth. That is, technically, the risk of massive economic failure is so high (so near a fully gamma proportion) that the interest rate is likely to remain accommodatively low to increase the rate of interest in growth rather than bidding up dwindling supplies (i.e., to control headline inflation).

Low interest rates, however, are being used to drive up headline inflation, which has a deflationary effect that in turn provides the incentive to keep rates low. The total effect tends to be a deflationary trend; and since the effect is high unemployment, which also supports the incentive to keep rates low and maintain a weak dollar, there is an ambivalent conflation of practical alternatives that only serves to make the problem worse (and seemingly unpredictable, which gives the outcome the exculpatory appearance of a legitimate force majeure). This anchors-in the need for austerity, which will support the deflationary trend by force of the inherent incentive (the entrepreneurial, "animal" spirit) to avoid the risk and maximize the return.

With unemployment high and incomes below the upper class being deflated (priced in the marketplace and accumulated into the upper class in zero-sum), non-headline inflaton is technically considered to be low. However, headline inflation is raging as the accumulation of money continues to drive up commodities as a class of financial assets rather than production factors, limiting growth and employment to near-zero interest.

Since inflation and unemployment is highly profitable, it only gets worse until it reaches the limit--and we have reached that limit. The wealth has become so consolidated (currently at pre-Depression levels) that the middle and lower classes have insufficient funds to pay the debt; and as we discussed in previous articles, insufficient funds results in default (a general economic crisis of liquidity, like the Great Depression). It is not that we don't have the money. There is plenty of money not being used to pay the debt. It will be deliberately withheld until it is assured little or no tax liability (by force majeure, of course, these deliberate actors contend, as market participants naturally limit risk to maximize reward, which accumulates the risk by offsetting it into an extensive, macro--arguably force-majeure--crisis proportion).

Factors that support the probability of an extensive crisis proportion also support equity valuations. Keep in mind that despite the current correction, low interest rates will support ("accommodate") equities along with low inflation (a high rate of sustained, structural unemployment and deflation of middle and lower class incomes--the "austerity" exacted to support equity valuations). Keep in mind, as well, the detriment exacted to support equity values yields negative, retributive value.

Since the means of pricing risk does not recognize the accumulation of retributive value, equity is falsely valued. The price does not fully reflect the value of the risk because it recognizes a liability attached to the economic reward derived from it, which is considered a political, rather than an economic, risk factor. This missing value will, nevertheless, be ontologically accounted for, force majeure, in an accumulative, crisis proportion. Despite the unavoidable ontology (remember that the risk of loss is fully assumed in priority), we must also keep in mind we are not necessarily determined to achieve complete, catastrophic failure in order to find success (having the freedom of self-determination in priority).

More interest in growth will reduce headline inflation and reverse the deflationary trend because there will be less money sitting on the bid in the commodities sector at a near-zero rate of interest. All that money we don't have being Dodd-Franked into increased reserves to protect us from catastrophic speculative demand instead of cultivating economic growth could be paying down the debt, and principle on lost equity, to prevent the impending crisis that Senator Dodd said, "will most assuredly occur." If all this "money we don't have" is reducing debt, it is not pushing commodity prices higher and deflating our economy. The probability for economic growth increases exponentially and reduces the false-positive valuation (the built-in anxiety) of equity shares.

With capital, however, anxious about weak demand because consumers are anxious about losing their jobs, the probability of an economic recovery from the private sector is nearly zero. (This is the "angst principle" I was telling you about in previous articles associated with accumulation of the risk proportion.) At the same time, keep in mind, discussion about why the level of anxiety is so high is also near zero.

Everything is nearly zero except, of course, the capital being gained from it. There is tremendous value being derived from the high anxiety, and since that high anxiety represents a high level of risk, the profit being gained is proportional to the present value of the risk. Technically, in fact, the high reward pefectly correlates inversely with the very low rate of interest, indicating a causal relationship that models as "making a profit by causing detriment" rather than economic growth. This is not "force majeure." It is a deliberate act of causing harm to make a profit and the result is debt, both public and private.

If, subsequently, we cut spending even further to pay down the debt, the result will be a depressionary trend--what the Fed is mandated to avoid at all cost because it is detrimental to elite and non-elite alike. Fed "accommodation" is literally to promote the general welfare and secure domestic tranquility. This is why the Fed is prescriptively an "independent" executive power, bureaucratically shaped to fit the working, elitist model and its set of false assumptions to the legitimacy of the general welfare.

Without being "free" to act independently through its "Open Market" Committee, the Fed would be less likely to conserve the risk and protect us from it at the same time. It would be less able to both conserve the value of the risk proportion (the profit being derived) and, at the same time, protect We The People from the general detriment that derives from the accumulation of the profit being derived. We see then, as discussed in the previous article, we are structured to be risk prone in the name of being risk averse which, frankly, is absolutely insane! It is a structural formula for high anxiety.

Remember that the Hamiltonian model is the working model. This model structurally assumes the benefit of public debt. It also assumes that people with wealth should not pay it. A progressive tax burden is a moral hazard because it "taxes the job creators." Taxing the rich inhibits the production of wealth that pays the wages and salaries needed to pay the debt. Thus, a progressive tax burden accumulates debt into a crisis proportion, but it will never result in default because the debt is secured by "the full faith and credit" of the Federal Government. Default is a moral hazard that is explicitly to be avoided by Constitutional authority.

While the Constitution provides for maintaining a public debt we all own, Hamiltonians maintain that rich people should not have to pay it. The more nearly zero the tax burden is for the rich, the better off everyone is because money (the capital) is then always free to produce the wealth of the nation. Just as important, according to Hamiltonians, a near-zero tax burden for the rich keeps money consolidated in the hands of those most capable to manage it in the public interest--a power elite.

From the beginning, Jeffersonians have strongly opposed the Hamiltonian hypothesis that keeping wealth consolidated in the hands of elite authority (like the king and his loyal, administrative aristocracy) secures the general welfare and ensures the domestic tranquility; and to this day, both parties claim to be more Jeffersonian (revolutionary) than the other by advocating and opposing the useful value of government. Although we cyclically disconfirm the Hamiltonian hypothesis, the assumptions of the model continue to be politically valid and in practical operation, accumulating fiscal and monetary errors that predictably present in a crisis proportion.

Currently, the crisis proportion is a near-zero rate of interest in economic expansion. It is more profitable to horde the capital and gross even more by borrowing at near-zero rates to bid up increasingly scarce supplies. Instead of accouchering economic expansion, the monetarist solution to liquidity crises (sufficient funding to pay the debt) is being used to rob us of the income we need to pay our debt (with one party claiming it is the problem and the other claiming it is the solution).

The crisis we face at this point is a crisis of legitimacy. Talking about that, however, is cause for some high anxiety. It is dangerously radical because it provides the political motive to change things by verifying, rather than validating, the legitimacy of power, like our founders did.