Why Are Interest Rates So High?

“If the U.S. Government were a company, the deficit would be $5 trillion because they

would have to account by generally accepted accounting principles. But they encourage reckless government spending because the government can issue Treasury bills at extremely low-interest rates”. Marc Faber

You may be wondering, what do interest rates have to do with politics? Strange as it may seem, politics has everything to do with interest rates. The first Secretary of the Treasury, “Alexander Hamilton, championed the idea of establishing a national bank to stabilize and improve the nation’s credit and improve the handling of the financial business of the US under the newly enacted Constitution.” In December of 1913, President Woodrow Wilson signed the Federal Reserve Act into law. The Federal Reserve was needed to head off “financial crises such as the financial panic of 1907 when the stock market collapsed, banks failed, and credit evaporated.”

Now we have the Fed riding heard over the banks, manufacturers, middlemen, and private individuals who are buying, selling, and lending. All is good, right? Not so fast dear reader. Did I mention the Federal Government and its big old printing press? You know, the one that can print money, even fiat money that has no gold or silver to back it up. In 1933 Congress and President Franklin Roosevelt enacted legislation to take the US off the gold standard. This nullified the right of creditors to demand payment in gold. It’s in the constitution[1]. The public had been hoarding gold because of the Great Depression in 1929.

Our federal government prints Treasury notes that always get paid on time, so they are ultra-safe, right? This could and did put the country in debt. You might have thought the government would never do such a thing unless we had to fight a war and needed temporary cash to win. Well, guess what? They are doing it now and have been for a long time.

Over the years, the congresses and the presidents realized they could stay in power longer if they could help some special interest groups and big donors with some profitable legislation. During the Obama, Trump, and Biden administrations, the national debt has grown to over 31.8 trillion dollars due to these unconstitutional practices. These three presidents have added 20.8 trillion dollars to the national debt so far. Biden is not finished yet.

Since the Obama Administration, we had very low-interest rates, and buying was fun due to the low rates of borrowing. Car loans were going for 0.9%, and home loans were as low as 3 ¾%. Many people bought new vehicles and new homes or refinanced their homes. Everything was not perfect. Saving money with low-interest rates was hard, and savings accounts suffered. The stock market was stagnant. Many people realized that if they could not save by investing. Some people decided to pay off their credit cards and loans with the money they would have invested. Bully for them.

Rodney Ramcharan is a finance and business economics professor at the University of

Southern California's Marshall School of Business. He told us inflation rates had been about 2.2 percent for a long time. That means buyers used to have a lot of power to plan for future major financial decisions like buying a home or a car. Now that inflation has risen above 6 percent, the Fed has hiked interest rates to disincentivize buying.[2]

"Although these actions may reduce the likelihood of a recession, lower- or middle-class consumers are more likely to be adversely affected. According to Ramcharan, wealthier buyers tend to have better credit scores, which means they may be less likely to default on their loans. That means they get better interest rates when borrowing for a car purchase, and as a result, they make lower payments and give less money to the bank in interest. Lower-income buyers, on the other hand, may not have lower credit ratings. That makes them riskier loan recipients. As a result, the interest rates at which they borrow will likely be higher, thereby increasing the overall cost of buying a car. "It's a higher risk [to lenders] to have less money," Ramcharan told us.[3]

For this blog, I am going to focus on one facet of buying and how it impacts our lives. Recently I decided to lease a car since I drive very little, and I hoped to reduce my payment to free up some income.

With the Fed raising interest rates every few months to slow down the spending by the public, the vehicle industry changed dramatically. Low-priced vehicles have small profit margins, so the car manufacturers built their more expensive models and loaded them with goodies. If you go shopping, you will see what I mean. This week I shopped at my local Chevrolet and Buick dealer, and they had nothing to fit my price range. Even a lease was beyond my means. They did have an interesting sale. All new trucks were available at 0.9%. Wow, that sounds too good to be true! You are right; it is too good to be true. It is financeable at 0.9% with free oil changes for life, but what about the price of the truck? Oh boy, anywhere from $57,000 to $63,000, even $75,000! Do you have any idea how much that is per month? You will find some interest calculators in the footnote section, so you can play with one you like and see what you can afford.

Check out this Car and Driver article by Elizabeth Rivelli for tips on buying a new or used car. It has a short quick calculator in the article. [4] Another good article by Camila Domonoske can be found here.[5] You will find some quick interest calculators here.[6]

To summarize this blog, let’s see what we have learned. Washington, the Fed, and our national government think it has the power to supersede the Constitution and dole out money to all their pals in their state, internationally, to donors and special interest groups. I am talking about Democrats and Republicans. There are some stick-in the-muds like Rand Paul who will not sign on to the ridiculous misnomered “Debt Reduction Bill” that did not reduce the debt. It was just the opposite; this bill increased the debt. So how does this affect me, the abused taxpayer? By spending more than we take in financially, our government is charged interest just like us, the ordinary suckers who try to live within our means. The government pays our creditors two billion dollars a day to service our national debt. Yes, let that sink in. That is why groceries, fuel, housing, vehicles, and all the rest have increased dramatically. Our creditors can stick it to us just like the lenders do when our credit score is low.

Are you angry yet? I am.

[1] Article 1, Section 10 of the Constitution.

[2] Motor Trend Staff, Car Shoppers Beware: Why Interest Rates Matter, Billy Rehbock, May 2, 2023 https://www.motortrend.com/features/high-interest-rates-impact-on-car-shopping/b [3] ibid [4] Should You Buy a New or Used Car? Elizabeth Rivelli, Car, and Driver January 30, 2023 https://www.caranddriver.com/auto-loans/a42690597/buy-new-or-used-car/ [5] Camila Domonoske, Why buying a car is such a miserable experience right now NPR/GPB February 8, 2922 https://www.npr.org/2022/02/08/1078333943/buying-a-car-chips-supply-chains

[6] https://www.bankrate.com/loans/loan-calculator/ https://www.calculator.net/interest-calculator.html https://www.nerdwallet.com/calculator/compound-interest-calculator