Capital goes through a multifaceted lifecycle. It is first conceived, then produced, subsequently consumed, and ultimately destroyed. The intricacies of this process unfold over decades and even centuries, shaped by various societal factors.
One generation may generate significant wealth, while the next may expend it. Conversely, a generation may bear the heavy burden of substantial government debt, shackling them with constraints that stifle innovation and determination.
Money’s value stems from what it represents. Each dollar should correlate with a dollar’s worth of produced wealth, while any credit created must reflect not only this wealth but also the anticipated growth in the form of interest.
This is the ideal framework for wealth creation in a stable financial system—one characterized by sound money management and fiscal responsibility. Unfortunately, the current reality often deviates from these expectations. Through government-imposed wealth destruction policies, value is extracted from creators and wasted through mismanagement.
This occurs via artificial currency, excessive spending, and central bank manipulation. Additionally, it is perpetuated through handouts, military expenditures, tax credits, and government-funded programs.
The outcome is a continuous cycle of distortion, misallocation, and increasing debt. Meanwhile, the diligent wage earner—who strives to save and live responsibly—faces an uphill battle for financial stability.
Plotted Dots
In a system rife with counterfeit money, large deficits, and central bank involvement, the integrity of money is consistently eroded. Its connection to actual wealth diminishes, leading to a decline in purchasing power while undermining the labor that earned it.
When governments engage in widespread counterfeiting, issuing currency devoid of real wealth backing, inflation of consumer and asset prices ensues—often culminating in a financial crisis orchestrated by the central bank.
This week, after a two-day FOMC meeting, a recent monetary policy statement was released. In essence, the Fed has maintained its federal funds rate target range of 5.25 to 5.5 percent. The dot plots also presented some new indications.
For 2024, the Fed anticipates three interest rate cuts totaling 75 basis points, lowering the median rate to 4.6 percent—a forecast in line with earlier projections. However, for 2025 and 2026, the Fed now forecasts fewer cuts.
Specifically, the FOMC’s median rate projection for 2025 has increased to 3.9 percent from 3.6 percent, and for 2026, it now stands at 3.1 percent, up from a previous forecast of 2.9 percent.
During the post-meeting press conference, Powell mentioned that regarding quantitative tightening, “it will be appropriate to slow the pace of runoff fairly soon.”
Does the change in Fed’s projected cuts for 2025 and 2026 hold significance?
In truth, these projections are largely irrelevant. By the time those years arrive, the economic landscape will likely be vastly different.
Highly Accommodative
More critical is the prospect of cutting rates in 2024 while facing a 3.2 percent CPI, which we find to be reckless. Given the enormous deficit spending from Washington, persistent inflation seems inevitable. The Fed’s plan for three cuts in 2024 reinforces this concern.
A federal funds rate within a target range of 5.25 to 5.5 percent typically indicates monetary restraint—unless prices are rising at 3.2 percent annually.
Utilizing the upper end of the federal funds rate target of 5.5 percent results in a real inflation-adjusted interest rate of 2.3 percent. If we assume the projected median rate of 4.6 percent post-cuts remains effective, that translates to a mere real inflation-adjusted interest rate of 1.4 percent.
These figures indicate that the interest rates remain highly accommodating.
The perceived restraint associated with current rates stems from society’s reliance on nearly free money, a legacy of over a decade of misguided monetary policies. Transitioning away from a zero interest rate policy may be painful, akin to switching from a 3,000-calorie daily diet; however, it may well be beneficial.
Acquiring real capital demands genuine effort, making its wise utilization crucial. The cost of funds, represented by interest rates, serves as the vehicle for guiding prudent capital usage.
The extended period of easy money following the 2008-09 financial crisis fostered an abundance of capital that, while seemingly beneficial, was actually artificial and lacked the effort necessary for true acquisition.
This fake capital mimicked real capital, allowing for borrowing and spending on tangible assets. However, the absence of genuine interest rate constraints led to unchecked usage of this false capital.
Why the FOMC Wants to Cut Rates
In summary, the influx of fake capital has generated numerous price distortions, facilitating ventures of marginal utility, excessive commercial real estate development, subpar electric vehicles, overpriced stocks, and more.
All tiers of government—federal, state, and local—have taken on cheap loans and spent recklessly, leading to a national debt surge from $11.3 trillion in 2008 to over $34.5 trillion today.
Likewise, corporations have procured inexpensive loans and invested in unproductive ventures, such as debt-funded share buybacks and dividend payouts. Without the central bank’s subsidy of fake capital, these tactics would likely not have surfaced.
Higher interest rates, driven by rising consumer price inflation, are designed to make capital more scarce and encourage responsible borrowing. Yet, with consumer prices inflating at an annual rate of 3.2 percent, the effective cost of funds at 5.5 percent—and soon 4.6 percent—does little to facilitate the prudent application of capital. Instead, it exacerbates existing distortions, debt accumulation, and speculative activities contributing to the current turmoil.
Given these realities, why does the FOMC favor rate cuts?
At Economic Prism, we refrain from making predictions about what interest rates ought to be. Rather, we advocate for letting the free market determine rates through the actions of willing borrowers and lenders, not a committee of un-elected officials.
Those bureaucrats lack any real understanding of appropriate interest rates, much like a neighbor’s pet. However, they certainly comprehend what they wish rates to be.
Ultimately, these officials serve the interests of the major banks, which desire lower interest rates to mitigate their questionable loans.
Thus, it is clear why the FOMC seeks to lower rates.
[Editor’s note: It’s intriguing how a handful of strategic decisions can create transformative wealth. I’m on the verge of making another pivotal decision and >> I’d like to extend an invitation for you to join me.]
Sincerely,
MN Gordon
for Economic Prism
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