CounterPunch Exclusives

CounterPunch Exclusives

The 2026 World Financial Crisis

Photo by Edwin Hooper

Interest rates are rising as if this will simply compensate investors for the risk of inflation. The reality is that it will increase the economy’s inability to cope with the breakdown that is already in progress.

How Did the Myth of Interest Rates Rising in Response to Price Inflation Begin?

The moral rationalization is to protect the purchasing power of creditor claims on debtors, as measured by the purchasing power of debt payments over consumer prices.

The pretense is that creditors use their interest to buy goods and services. But already in the 18th century, critics of debt financing recognized that bondholders recycle most of their money into new loans. When they do spend part of their interest income into the “real” non-financial economy, it is mainly to buy prestige real estate, primarily in major financial centers, and secondly on luxury goods – mainly imported, in Italy in the mid-18th century, just as today.

By the 19th century, creditors sought some excuse to justify their interest charges by depicting these as compensation for the risk that they might have to suffer a loss through loan defaults or by a loss of their purchasing power over goods and services as prices rose – and more to the point, over the labor that produced these products.

Austrian economists such as Böhm-Bawerk went so far as to claim that interest was a payment for the “service” of abstaining from consuming their income, but using “time preference” to consume more later. Having to pay interest, thus was depicted as the price of “impatience.” It was as if wage earners (“consumers”) had a choice to abstain from running into debt, lacking prudence. This prompted Marx to quip that the Rothschild bankers must be the most abstinent family in Europe. It was as if there was no financial sector of bankers and bondholders acting independently of the economy of production and consumption.

Raising Interest Rates to Slow Employment and Keep Wages Low

The more recent 20th-century logic is that of Paul Volcker, when he increased interest rates to over 20% at the end of the Carter administration in 1980. He saw wages rising as a result of the Vietnam War’s “guns and butter” fiscal policy, called military Keynesianism in times when the aim is to increase profits, investment and employment. Volcker, formerly a Chase Manhattan banker, wanted to increase unemployment so as to keep wages from rising further. He succeeded in creating a crash as bank interest rates rose to 20%.

That obviously is not the aim of today’s rise in interest rates. But it is the effect. And this is just the opposite of compensating for risk. It sharply increases economic risk throughout the economy, not only for industry and employment but for the financial sector. That is what makes today’s high stock market prices so puzzling, a short-term focus on just riding the wave of rumors floated by the Trump administration about the likelihood of peace restoring the happy status quo ante.

Governments Lower Interest Rates Mainly to Increase Debt-Leveraged Prices for Financial Wealth

The guiding fiction in the idea that rising interest rates will slow price inflation by reducing investment and employment that banks help the industrial economy by creating credit to lend to companies to expand the economy. But that is not what banks do under finance capitalism. They lend against assets already in place and available to be........

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