The Federal Reserve Continues To Pull the Wool Over Everyone’s Eyes

May 19, 2024 | Categories: Articles & Columns | Tags: |  Print This Article

The Federal Reserve Continues To Pull the Wool Over Everyone’s Eyes

Paul Craig Roberts

The New York Federal Reserve bank reports that US household debt has hit a new record. Americans are increasingly using credit card debt at high interest rates to pay for their living expenses. Delinquencies are rising. About 17% of Americans are using 90% or more of their credit card limit and an additional 11% are using 60-90% of their credit card limit. That means 28% of American households are heavily indebted at high interest rates that prevent their ability to pay down the debt. Many struggle to make minimum payments, which means their debt increases monthly from interest alone without new borrowing.

The 20% plus credit card interest rates go far beyond usury. It makes one wonder how a consumer economy can survive when so much of personal income is drained off in debt service. How can consumers be causing inflation when they have no discretionary income to spend? What is the point of the Fed restraining the economy to combat inflation when the economy is already tightly constrained by debt service?

Is the Fed really this mindless? Let’s examine this question further.

Last Tuesday Michael Barr, a Federal Reserve vice chairman told a House committee that delinquency rates are rising among commercial real estate loans backed by office buildings, auto loans, and consumer loans. He reported that commercial real estate delinquencies are at a 5-year high and that credit card and auto loan delinquencies are rising. The Federal Reserve is proposing increases in capital requirements for banks so that they can meet the stress of rising delinquencies.

Mr. Barr does not say where the banks will get the funds with which to increase their reserves when the banks are in a position in which they must continue lending to over-indebted persons and businesses in order to avoid defaults, and when the banks’ balance sheets are loaded up with low-paying assets acquired during the Fed’s many years of zero interest rates. The banks’ own balance sheets might be no better than the balance sheets of their delinquent borrowers.

What is not being said is that the Fed’s many years of zero interest rates produced a bubble in real estate and financial asset values that the Fed’s high interest rate policy is now pricking. The Fed’s policy is nonsensical, because the inflation is not a consumer-driven inflation but is caused by the Covid lockdowns that destroyed businesses and disrupted supply chains and by US sanctions that have backfired on the West, adding to the disruption of business and driving up costs. The Fed’s high interest rate policy is driving us into another financial crisis. As I explained in my four part series, “The Great Dispossession,” it is our personal financial assets that regulators have designed as collateral with which to bail out financial institutions.

In other words, this time around, it is our bank balances, stock and bond holdings, and retirement funds that are at risk. They are designated as the collateral for secured creditors of failed financial institutions.

If you did not read my four part series or take it seriously, you are advised to read it now. There is nothing you can do about it, but there is some advantage in not being blind-sided.