The Fed is courting disaster by leaving interest rates too low

This week, the Federal Reserve likely will vote to cut interest rates — when it should be raising them. If the economy is so dependent on low interest rates that a near-record-low rate of 2.4 percent isn’t low enough, there is something wrong with the economy, and piling on more ♐cheap debt will make the crash ꦑthat much harder.

Since the financial crisis of more than a decade ago, America and the world have gotten dangerously𝓡𒉰 addicted to debt. The Fed has fed the addiction.

The Fed (roughly speaking) sets the interest rate at w💧hich banks can borrow. The lower the rate, the lower the rate at which banks will lend to homeowners, credit-card borrowers, car buyers and the like.

In 2008, as the financial system was failing, the Fed pushed its kཧey interest rate down to zero and kept it there for seven years. The point was to get peoplꦗe spending again. Since they had little discretionary income, they couldn’t spend more unless they could borrow more.

The problem is that cheap debt got the economy into trouble in the first place. By 2008, after a decade during which interest rates were also low, people had already borrowed so much that they cou๊ldn’t borrow anymore. Household debt had nearly doubled between 2000 and 2007, to $14.2 trillion from $7.2 trillion. Choking on mortgage debt, in particular, Americans cut off their spending.

🍬Americ🔯ans were sending an important market signal; something was wrong. But the Fed wanted the economy to ignore this signal.

All of this has “worked.” Household debt is at another record high, at $15.7 trillion. Even entities that didn’t partake in the last boom jumped in. Corporations have ­increased borrowing, to close to $10 trillion, from $6.3 trillion on the eve of the financial crisis. The fede🃏ral government has tripled its debt, to $18.2 trillion from $6.1 trilli🌜on.

Last week, one hedge-fund manag𝔉er told The Financial Times that “every deal I’ve looked at in the past two weeks has been pure garbage” — indicating that much of this borrowing won’t be paid back.

Debt has trickled down — inefficiently — into the “real” economy. Yes, it’s good news tha𓆏t a record number of people a💜re working.

Yet what is the price?

The United States has sacrificed one of the tenets of free markets: ­rational valuation of assets. When people and companies can borrow an unlᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚimited amount of money to buy stuff — houses, stocks, bonds, other companies — they push the price ൲of that stuff up. An index ­favored by Yale economist Robert Shiller shows stock prices trading at more than 30 times earnings, higher than at any time except the tech bubble of 1999.

But stock prices are the least strange of stranger things. As James Grant of the Interest Rate Observer points out, for $13 trillion worth of global bonds, interest rates are negative; that is, lenders pay people to borrow money. “There’s been nothing like it in 4,000 years,” he wrote in The Wall Street Journal.

It is no longer bizarre that Uber was able to list itself on the stock market at a valuation♍ of $82 billion in May, despite infinitely projec✅ted losses.

In mid-July🧸, Europe’s biggest financial-technology company, N26, blithely told the world that “in all honestly, profitability is not one of our core metrics. . . . In the years to come, we won’t see profitability. We’re not aiming to reach profitability.” Um, come again?

It is beyond꧒ weird that trillions of dollars in global capital can find no use but to destroy themselve𝓡s in unprofitable ventures.

Yet the Fed has created a tr🌃ap for itself. If it doesn’t keep the debt coming, it will ruin the illusion. It’s also under outside strain. “Our Federal Reserve doesn’t have a clue!” the president tweeted recently.

The Times agrees, noting that the Fed “should demonstrate its independence” by doing what Trump wants, “because the economy needs the help.” What is the economy going t🔜o need when the recession comes? Rates of negative-10?

The Fed justifies itself in saying that infla🅺tion is low, so it has room to pump money into the economy. But the Fed is fighting the last war, inflation in everyday goods♔ and services, and ignoring what its ­asset inflation is doing to free markets.

How will voters react to an ­already beleaguered capitalism when they percei🤡ve it as based on imaginary numbers?

Nicole Gelinas is a contributing editor of City Journal.

Twitter: @NicoleGelinas