Posts Tagged ‘Prime rate’


This morning I had coffee with a friend who’s a CPA, and we talked for over an hour about the economy, and especially about how those of us who work for a living are getting screwed. There are almost innumerable ways — pick an area, any area — but for now we’ll stick to the purely economic. Here are few of the things we talked about:

  • Dividends and capital gains (basically profits from selling stocks and bonds) are only taxed at about half the rate of money earned through work. If you work for a living in the USA, you’re probably paying about twice the amount of income tax (as a percentage of income) as a trust fund kid who’s never worked a day in his life.
  • If you work for a living and have to spend all, or nearly all, of the money you earn, you’ll pay a much higher effective tax rate on the necessities of life than wealthy people. Here’s why (to keep things simple, we’ll only talk about sales taxes here): If you live in an area with an 8% sales tax rate, make $2,000 a month, and spend $1,000 of it on such things as clothing, food, car parts, and beer (mustn’t forget the beer), you’ll end up paying 4% of your income in sales taxes. If you’re a trust funder with an income of $20,000 a month from dividends and capital gains (i.e., income not derived from useful work), and similarly spend $1,000 on clothing etc., your effective tax rate on those necessities will only be .4% of your income — one-tenth the rate of a $2,000-a-month wage earner.
  • If unemployment is low, and wage growth starts to outstrip the rate of inflation, the Federal Reserve Board will raise the prime rate to create more unemployment and keep wages down (as it’s doing at present). How does an increase in the prime rate do this? It “cools the economy” by making it more expensive for businesses to borrow and then spend the borrowed money on new facilities, machinery, or wages for new workers. It also raises the cost of consumer borrowing, especially as regards home mortgages. And the higher the mortgage interest rate, the fewer mortgages are taken out; this puts a damper on new construction and so decreases the number of construction jobs and also jobs in the industries that supply construction firms. Hence “economy cooled” and wages held down.
  • If you work for a living, have little or no savings (as is typical), and have to borrow money for a medical or other emergency, you’ll likely do so on a credit card, on which you’ll be paying sky high interest, probably in the 15% to 20% range, if not higher. If you’re wealthy and decide to borrow money, you’ll likely pay an interest rate in the low to mid single digits.
  • Under Trump’s much vaunted tax cut, 83% of the benefits go to the wealthiest 1% of Americans.  The rest of us get crumbs and will have to pick up the tab in fairly short order, in the form of goods-and-services price inflation and higher interest rates on credit cards and mortgages. In essence, Trump’s tax cut is a massive wealth transfer from those who do useful work to the ultra-rich, who don’t. (Disgustingly, some working class people are happy to scarf up crumbs and lick their masters’ boots and grovel like dogs.) And if you think giving the rich ever more money is somehow a good idea, that’s been de facto federal policy since the time of Reagan; and how has that worked out for you? Yes, it has! Good boy! What a good boy! Lick up those crumbs! Good boy!

I could go on, but won’t.

To put it simply, the economic deck is stacked against those who work do useful work, especially those who do useful work, won’t exploit others, and have some self-respect.

 


Back in the ’80s, a friend told me, “If you really want to know what’s going on, pay more attention to the business pages than the front page.” By and large, he was right. I’ve been following business news for decades, because it’s often refreshingly forthright about what the multinationals and their minions in government are up to, and what they’re planning to do to us.

That’s often so, but not always. Business reporters sometimes use the same types of euphemisms, propaganda terms, and code words as politicians.

Which brings us to the topic at hand: “wage inflation.”

These seem to be the code words of the week on CNBC’s “Nightly Business Report,” where the hosts and correspondents tend to use that ominous sounding term (rather than the more honest “wage growth”) to explain why the Fed is going to raise interests rates — probably more than once — this year.

But what does “wage inflation” actually mean? It means that unemployment is low; that wages are going up faster than the rate of inflation; that it’s relatively easy to find a job or dump a loathsome one and (hopefully) find a better one; that rising wages will increase demand, which in turn will spur creation of new businesses and expansion of existing businesses to meet that increasing demand; and that that growth spurred by increased demand will lead to something approaching full employment and even higher wages.

Sounds pretty good, doesn’t it? Well, it is — for most people.

But not for the multinationals, big banks, their executives, and their shareholders. Why?

In theory, we have an economy based on competition. In many areas that’s no longer the case — think utilities, Internet providers, “defense” suppliers with cost-plus contracts, agribusiness subsidies/”price supports.” These monopolistic entities can simply pass along the cost of wage growth to customers, because customers have little if any choice.

But there still is competition in some areas of the economy. There, wage growth corresponds to lower profits. Why? When they have choice, customers will generally buy the lowest cost product or service. As well, importantly, there are two primary places where businesses can cut costs to remain competitive: wages and profits. (They can also cut corners, using for example inferior components, but there tends to be blowback from this, sometimes quite quickly and quite severely.)

So, in competitive areas of the economy in times of full or near-full employment and rising wages, there’s only one place where there can be significant cost savings: profits — dividends to stockholders and the now-routine gross overcompensation to executives (which would otherwise go to stockholders).

That’s why there are alarmed cries of “wage inflation” and “the economy might ‘overheat!'” every time it even seems like there might be full employment (or something close to it) and wage growth.

This is why even though the GDP rose at a relatively modest 2.6% last year (slightly lower than expected), business economists and commentators were alarmed: wages rose at 2.9%, a full .3% above GDP growth and (gasp!) a full .8% above the rate of inflation, with the prospect of more wage gains as the economy grows. And we just can’t have that, even though corporate profits are at or near all time highs. (Second quarter 2017 profits were at 9.5% of GDP, with analysts forecasting 11% in 2018.)

So, what to do, what to do? It appears that the usual “remedy” will be applied this year and next: the Federal Reserve Board will likely increase the prime lending rate several times. The purpose of these increases? To slow economic growth.

How do rate increases do this? One way is that it makes the cost of borrowing higher for businesses, making them reluctant (or more reluctant) to spend money on infrastructure, on new physical plant. The other way is that interest rate increases make it more expensive for consumers to borrow money, the two primary places being higher mortgage rates and credit card rates.

Both of these things take money out of the pockets of consumers and put it into the pockets of the big banks and the credit card companies. Since consumers have less money to spend on actual goods and services, this decreases demand. Then, since the monopolistic (or oligopolistic) companies (think your lovely Internet or cable TV provider) are under no constraints not to pass along the interest rate increases, they’ll pass along the entire cost to the consumer, again decreasing the amount consumers have to spend on other goods and services, and again decreasing consumer demand (roughly 70% of the economy).

The end result? Decreasing consumer demand, a slowing economy, higher unemployment, stagnant wages, and continued sky high profit margins for the banks and corporations.