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To understand why this has been happening — and why it may continue for a very long time — one must recognize that there is a direct relationship between the interest rates that are paid to savers, and the interest payments made by a heavily indebted federal government.
So the very same major increase in interest rates that so many millions of savers badly need for their financial security — could simultaneously send the national debt spiraling upwards and out of control.
Let me suggest that this relationship creates an extraordinary financial conflict of interest between savers and the government. Many people believe that the enormous national debt is a somewhat theoretical problem for the future. At the same time, they are quite frustrated by the very low interest earnings that could force them to delay retirement, or if they are currently retired, that are already reducing their standard of living.
When we understand this essential point, we can see that massive national debts dramatically and directly impacting the lives of many millions of people is not something to anticipate in the distant future, but rather it is happening right now just as it did last year, and just as it will likely happen again next year.
With the Federal Reserve repeatedly but slightly increasing interest rates between December of and December ofmany commentators are suggesting that a return to "normal" interest rates is on the way. What the national debt does is place limits on where interest rates can go.
Interest rates can go up sharply - but only for a brief period of time. And to see why that is the case, we need to understand the relationship between the national debt, interest rates, and saver and retiree income.
This analysis is part of a series of related analyses, an overview of the rest of the series is linked here.
A Mysterious Reduction In Interest Payments The graph below shows the amount of federal debt outstanding over the last 40 years. Now ordinarily if we think about having our debts balloon out of control, we would expect to be making much higher interest payments.
That is, all else being equal, if our debt doubles or triples then our interest payments should double or triple. To the contrary, interest payments by the federal government have either been falling or level ever since the financial crisis began. How can this be? As plainly shown in the graph, the answer is that interest rates have in recent years plunged to their lowest levels in the last 40 years.
It should also be noted that even with the highly publicized increases by the Federal Reserve between and — interest rates are still far, far below normal.
The Federal Reserve System is primarily funded by interest collected on their portfolio of securities from the US Treasury, and the Fed has broad discretion in drafting its own budget, but, historically, nearly all the interest the Federal Reserve collects is rebated to the government each year. Interest Rate in the United States averaged percent from until , reaching an all time high of 20 percent in March of and a record low of percent in December of In the United States, the authority to set interest rates is divided between the Board of Governors of the Federal Reserve (Board) and the Federal Open Market Committee (FOMC). Note: at this time the FED has adopted an interest rate range of % to %. Federal Reserve System (FED) The central bank of the United States is the FED.
At the very same time, savers and investors have also been experiencing these very low interest rates. To have interest rates plunging even as the amount of debt outstanding was soaring upwards! And generally speaking, this is where a lot of confusion can occur when trying to understand the debt and the deficit, because indebted national governments that can borrow in their own currencies are nothing whatsoever like individuals or corporations being in debt.
In the case of the United States, interest rates have been controlled for some years now through the actions of the Federal Reserve. That is, as illustrated in the graph below, at the very same time that the federal deficit has been soaring, the Federal Reserve has been quite literally creating trillions of dollars out of the nothingness and using this brand new money to purchase United States debt — not directly from the US government, but through the markets.
In doing so, the Fed has taken control of interest rates in the short, medium and long term in the United States. It is worth noting that that this process of quantitative easing has not actually ended in the US, it has just stabilized, with the Fed buying enough securities to replace principal payment receipts, thereby keeping total holdings level.
Thus there is nothing fortuitous or "lucky" about the current very low interest rates — but rather they are a direct result of governmental policies. This is the math that drives conventional long-term investment models — each dollar invested creates another six dollars and more, thus savers who practice long-term discipline are highly rewarded over time.
That is, tax revenues are not sufficient for the federal government to make either principal or interest payments on the federal debt. So each time a principal payment is due — the federal government issues a new debt to get the money to pay off the old debt.Raising the rate makes it more expensive to borrow from the Fed.
That lowers the supply of available money, which increases the short-term interest rates.
In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis.
Reserve balances are amounts held at the Federal Reserve to maintain depository institutions' reserve requirements.
Institutions with surplus balances in their accounts lend those balances to . Note: at this time the FED has adopted an interest rate range of % to %.
Federal Reserve System (FED) The central bank of the United States is the FED. At their core, the interest rates that we pay on borrowed money for our businesses are set by the Federal Reserve.
The U.S. Federal Reserve System and money supply The U.S. Federal Reserve System (“the Fed”) is the Central Bank of the United States.
United States’ Monetary PolicyThe U.S. Congress has established that the monetary policy objectives of the Federal Reserve are to promote maximum employment and price stability in what is known as the “dual mandate”.
The Federal Open Market Committee (FOMC) is the Fed's monetary policymaking body. Board of Governors of the Federal Reserve System. The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.