Why interest rates go down and inflation will go up

Just a few years ago, money on my savings account provided me with a handsome 4% interest each year. Since the inflation was significantly lower, there was solid cash to be made by bringing Your money to the bank.

But then everything changed. Both interest rates and inflation dropped rapidly to a similar level.The only remaining way for consumers to make a buck out of savings was to put their money away for fixed timeframes up to 10 years into deposition accounts.

(Wouldn’t ya love to get ya hands on that?)

But then it got worse. At the moment I am writing this (2015) some banks are starting to charge a negative interest rate on savings accounts. Pardon me? Yes, some banks charge You money when You bring them Your money. Indeed, completely ridiculous and totally contradictory to all financial and economical principles as we know them in modern society. But I truly fear that in a short time this is going to be a prevailing situation.

Why does this happen? I think this is not just the “invisible hand” of the economic system. I don’t think this result is caused by millions of people all pushing the system democratically. Nope. I think it is much more likely that these negative interest rates are directed by a very small group of people. Because low interest rates are very convenient for the most powerful institution in the world; being the US government.

Have a look at http://www.usdebtclock.org/ to see the current national debt of the USA. At the moment I write this, the US national debt is over 18 trillion dollars (!), making the USA the biggest debtor in the world by far. The US government is spending billions of dollars each year on the interest of that debt alone. And the US government pays that interest by borrowing even more money, thus creating an even bigger debt.

I guess every middle school pupil knows that is a bubble that is destined to burst. And when it does, America loses its position as the most powerful and the most trusted economy in the world for many years to come.

There is only one way out. And that starts with a zero percent interest rate. If the interest rate on the US national debt can be brought down to zero percent, the US government is freed from its interest payments. Heck, You could even borrow as much money as You want if You don’t have to pay interest at all!

But the question is if this is the end of our scenario. Because a zero percent interest rate has many downsides. Especially for a very particular kind of friends of the US government, being the banking sector.

The products that banks sell, are loans. The interest rate is the price of that product. In general: high prices allow for high profit margins, low prices allow for low profit margins. The lower the interest rate, the more difficult it will be for a bank to make money out of the difference between the interest rates on loans and savings. So at some point the American bankers might ask their buddies at the US government to arrange for the interest rates to rise again.

The US government can only do that if the US national debt will decrease in comparison with the federal budget. So then the US government will have to start paying their debts and they can’t unless they raise taxes. And the ruling party (no matter if they are Democrats or Republicans) doesn’t want that because then they will lose the next elections.

But luckily, there is one last resort, one final option for getting rid of the debt problem without paying interest, raising taxes or going bankrupt. And that is inflation. Raising the general level of prices generates higher tax revenues for the government without the need for raising tax rates.

The bottom line is; the easiest way for the US government to get rid of their awkward debt situation is some good old inflation. I guess about 5-10% per year over a 20 year period will do the trick. Tax revenues could triple in that timeframe, allowing for the US government to keep on borrowing money. There should be enough margin to raise the interest rates a bit to keep the banker-boys happy.

The only one who is not going to benefit from this, is You. You will see the prices of groceries, gaz, insurance, electricity, public transport, tuition for Your kids, etcetera, go up each and every year. Your income might increase a bit too, but when You seriously do the math, You know your income does not keep up with these higher prices. And the little savings You have give You a crap interest rate at the bank.

Now in this article I took the US government as an example since the are the largest debtor in the world. But the main principle as described above is applicable to most countries.

So my prediction for the next 10 years is: the governments and the banks will save their *sses by maintaining a low interest rate combined with higher inflation. They win, You lose.