Feb 13, 2012

Why Would Higher Interest Rates Be Good for Small Business?

[caption id="attachment_393" align="alignright" width="425" caption="Higher Interest Rates"]

[/caption] It is clear that we have two levels of interest rates in the U.S. economy: the rate of interest for the U.S. government to borrow money and the cost of capital for everybody else. We do not think we need to spend too much time explaining the current level of U.S. Treasury yields except to state:

The U.S. Federal Reserve Bank has targeted the federal funds rate to equal approximately zero to 25 basis points.
The U.S. Federal Reserve Bank has produced long-term interest rates for U.S. government-backed instruments by bond purchases through QE1 and QE2.
Foreign demand for the U.S. Treasurys is high as U.S. dollars held by foreign governments are being repatriated in the form of Treasury bond purchases that conceptually are viewed as a safe haven.

The U.S. government should immediately stop interfering in the economy by forcing rates to decline, devaluing our currency, and planting seeds for hyperinflation down the road. We all believed in Nasdaq 5000 (2000 Q1), residential home prices will never go down (2005), and gold is dead money (1999). Are we ready to accept the $10 loaf of bread, the $10 gallon of gas, and the $20 T-shirt? That is where we are going as the U.S. government inflates its way out of its debt binge. In addition, interest rates need to adjust to levels that enable business owners who deserve capital to acquire capital, instead of having investors perpetually buying U.S. Treasurys for inherent capital appreciation backed by the perpetual Bernanke bid. The U.S. government through its perpetual bid has taken the perceived risk premium out of owning U.S. Treasurys. It is hurting savers and investors, and in an unforeseen way is crowding out an appropriate interest rate and cost of capital that should be going in to the private sector. Higher interest rates and a stronger U.S. dollar will encourage capital flows to the private U.S. economy, which will cause Washington to pay higher levels of interest on its debt and encourage the U.S. government to stop its precipitous spending. At current low levels of interest rates, the U.S. government is not being punished enough for its excessive borrowing and spending habits. The U.S. government and small businesses are better off paying higher interest rates and having capital available rather than the current market scenario where the U.S. government has forced rates lower and is crowding out the private sector for capital. This article originally appeared on Forbes.com.