The Federal Reserve refuses to lower its bench-line interest rate until inflation cools down. Basic economic theory says that keeping rates high in an inflationary period helps to bring prices down though it can take time.
Does that theory hold up when the Fed — at the behest of Congress and the White House — printed nearly 80% of all dollars floating around in today’s economy? The money printer has been running day and night since the Washington DC brain urged businesses to shut down for 14 days to “flatten the curve.” The Fed has been spending way more than it takes in over the past three years and is selling more bonds than ever in its 100-year-plus history.
Some financial experts, such as Valance founder Warren Mosler, warns that high interest rates are actually keeping inflation high. Mosler argues the rate hikes made by the Fed since March 2022 might’ve helped if Congress and the White House actually cut spending. Instead, it kept deficit spending going and upped the ante by passing the $1.9 trillion American Rescue Plan Act of 2021.
Small- to mid-sized businesses increasingly can’t afford to borrow to invest back in their businesses. What Mosler calls real dollars — cash on hand for the average business — is tougher to come by as the banks are risk-averse these days.
Just six months ago, the prevailing wisdom was the Fed would make multiple rate cuts starting in March 2024. Now it looks like Powell and company are spooked. Maybe they make a quarter-point move at some point, maybe they won’t. Not touching the rate is arguably the safest political move in an election year.
Keeping the Lights On is Getting Costlier
The Kobeissi Letter reports that 43% of small businesses couldn’t afford to fully pay all of their rent in April, the highest rate since March 2021. “More than 50% of small businesses claim that now rents are higher than six months ago,” finds Kobeissi. “Meanwhile nearly 60% of firms founded after the pandemic report that they are earning less than a year ago.”
Small biz “accounts for 44% of U.S. gross domestic product,” notes Kobeissi. Roughly 33 million small businesses employ 61.7 million people, or 46% of the American workforce. “From 1995 to 2021, small businesses created 17.3M net new jobs or 63% of net jobs created.”
Since late 2020, nearly all new jobs added to the U.S. economy are part-time and are going to illegal aliens or foreign-born workers. American-born workers are doing worse notwithstanding the federal government’s attempts to spin job numbers as positive.
