by Michael Hudson,The Unz Review:
Trump is threatening to escalate his war against Iran, and Iran is prepared to destroy the oil production and transport capacity of Arab OPEC countries that do not act to stop the U.S. attack. The result will be to deepen the world depression that already is underway.
Yet the stock market has continued to rise, as have interest rates. The latter cannot stay up without crashing the real estate and stock markets. Yet the media and many investors view interest rates as rising so as to compensate investors for the risk of inflation. The reality is that higher interest rates will increase the economy’s inability to cope with the breakdown that already is in progress.
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How did the myth of interest rates rising in response to price inflation begin?
The moral rationalization is to protect the purchasing power of creditor claims on debtors, as measured by the purchasing power of debt claims over consumer prices.
The pretense is that creditors use their interest receipts to buy goods and services. But already in the 18thcentury, critics of debt financing recognized that bondholders recycle most of their money into new loans. When they do spend part of their interest income into the “real” non-financial economy, it is mainly to buy prestige real estate, primarily in major financial centers, and secondly on luxury goods – mainly imported from Italy in the mid-18thcentury just as today.
By the 19thcentury, creditors sought some excuse to justify their interest charges by depicting these as compensation for the risk that they might have to suffer a loss through loan defaults or by a loss of their purchasing power over goods and services as prices rose – and more to the point, over the labor that produced these products.
Austrian economists such as Böhm-Bawerk went so far as to claim that interest was a payment for the “service” of abstaining from consuming their income, but using “time preference” to consume more later. Having to pay interest thus was depicted as the price of “impatience.” It was as if wage earners (“consumers”) had a choice to abstain from running into debt, lacking prudence when they did so. This prompted Marx to quip that the Rothschild bankers must be the most abstinent family in Europe. It was as if there was no financial sector of bankers and bondholders acting independently of the economy of production and consumption.
Raising interest rates to slow employment and keep wages low
Source: SGT Report
