Conflict of Interest
April 2024
“I am more concerned about the return of my principal than the return on my principal.” Will Rogers
During my sophomore year in college, I recall sitting in the back of an auditorium listening to my economics professor discuss the concept of interest, an ostensibly simple and common term. My peers seemed to thoroughly comprehend the professor’s lecture, but my mind was filled with so many questions. Was I the only one who didn’t understand this basic notion? I finally found the courage to raise my hand and ask; “Why, exactly, is there a cost associated with borrowing money, and what determines the cost?” My professor paused for a moment, then rather offhandedly replied, “The central bank,” before continuing on with his lecture. I felt frustrated and perhaps a little embarrassed. He had only addressed my second question, and I had a strong suspicion it was a partial answer at best. On behalf of those who, like my younger self, may not fully understand the cause and nature of interest rates, I’d like to provide a more complete answer.
A good place to start is the Treasury yield curve, which is nothing more than an X/Y graph illustrating Treasury rates over a period of time. The US Treasury yield curve is the most important in the world as it’s the benchmark risk-free rate, and all risk assets are priced on some spread to the risk-free rate.
The Federal Reserve does, in fact, have a great deal of influence on interest rates. However, the Fed technically sets only one rate: the discount rate, which is the rate of interest that member banks pay to borrow directly from the Fed’s Discount Window. However, the central bank’s key policy tool is the federal funds rate. While often described as a specific rate, it’s actually a target range, currently 5.25–5.50%. The FOMC uses open market operations (buying/selling government bonds from/to member banks) to keep the rate within the target range.
In addition to monetary policy, there are a myriad of other factors that affect the yield curve, including general price levels (commonly referred to as inflation), economic growth, global markets, and fiscal policy. As previously mentioned, the Treasury yield curve reflects the risk-free rate an investor can earn over a period of time. The market rate, however, will always be higher. For example, since 1928 corporate bonds have outperformed Treasury bonds by over 2%/year, so the risk premium for owning risky bonds over the past 96 years was ~2%.
The two most important factors in determining risk premium are risk of loss and opportunity cost. To illustrate, risk of loss would include investing in a corporate bond whose issuer becomes insolvent and you, as an investor, only receive a portion (or perhaps none) of your investment back. By contrast, opportunity cost is the forgone profit or return one forsakes when choosing one alternative (investment, career, etc.), over another.
Let’s return to the graph above. It’s important to understand that the curve is currently inverted, meaning short-term rates are higher than long-term rates. This is both abnormal and unhealthy. The natural relationship between rates and term is positive, meaning the longer the term, the higher the rate. Investors require a commensurate premium for locking up their money, so a normal Treasury yield curve would be upward sloping.
It should be noted that the fed funds rate is simply an arbitrary target determined by a group of academics, all of whom have been heavily influenced by Keynesian theory. The Fed manipulates the short-end of the curve to stimulate/restrain the economy in accordance with policy objectives. And while the Fed can and does affect intermediate and long-term interest rates (e.g., quantitative easing/tightening open-market purchases, etc.), the yield curve beyond two years is almost entirely market-driven.
A recent example of Keynesian policy being the Fed’s COVID monetary stimulus, during which the fed funds rate was reduced to effectively zero and central bankers boosted the money supply by 40%, or $6 trillion in just two years. Despite Fed chair Powell’s and Secretary Treasury Yellen’s assurances that price levels would remain benign, by June 2022 the CPI eclipsed 9%—7% above the bank’s inflation target, and since 2021 consumer prices have increased 20%. But don’t worry; it’s just transitory.
The Achilles heel of the Fed is their arrogant, misguided belief they are smarter than the market. They aren’t. Free markets communicate accurate pricing and result in allocational efficiency. However, the Fed wields it’s $7.5T balance sheet and policy tools to bend the market to its will. Unfortunately, the Fed’s efforts have historically proven detrimental to the long-run health of the economy, oftentimes leading to an erratic dollar, rampant inflation, asset bubbles, a collapse in aggregate demand, and abetting profligate bureaucrats.
A central bank is a necessary component of a healthy monetary system, however, what’s good for We the People and what’s good for Uncle Sam aren’t always the same. Monetary policy should seek to achieve price stability (zero inflation rate) and a stable, trustworthy financial system. The Fed’s foolish notion that loose money is a universal panacea for all aspects of public policy is a conflict of interest at best, and malfeasance at worst.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
pathwaytoprosperity.com
26 Comments
brrbet33
Okay okay, I found another betting site brrbet33 and I thought it was amazing and fantastic. It’s a fun place to spend time with your family. Check it: brrbet33
317betapp
Just stumbled across 317betapp. Looks like another betting app. Anyone know if it’s any good? Decent odds? Easy to use? I’m thinking about downloading it but always good to get the lowdown first. Have a look here: 317betapp
rh365casino
Rh365casino, alright. Games are alright, nothin too crazy. You could do worse. Check them out here: rh365casino
royalwincom
Royalwincom… the name sounds promising! Gave it a browse and honestly wasn’t blown away, but it’s functional and has what you need. Check it out for yourself: royalwincom.
winpotdeportes
Winpotdeportes, checked this out for sports betting. Quite straightforward, I must say, and fairly easy to navigate. Might become my regular platform. Have a look if that’s what you are looking for: winpotdeportes
acesupercom
Acesupercom, okay… another new one. Lots of these pop up, eh? Hope it’s legit and not just another scam. Anyone vouches for it? Decide on your own here: acesupercom
66bet1
Gave 66bet1 a shot on a whim. It is fine, nothing particularly special, but does what it says on the tin. Give 66bet1 a go if you have some time.
vu88ad
Hey gamers, checked out vu88ad and it seems pretty legit. Some interesting promos I saw. Might be worth checking out for some good deals! vu88ad
84win219
Yo, 84win219! Just signed up, and the site is smooth. Deposits were quick, and the game selection is solid. Hoping for some big wins, but even if not, seems like a legit place to have some fun. Check them out here: 84win219
ndrppagcor
NDRP Pagcor… Definitely a useful resource! Keep the content coming! Explore the possibilities here: ndrppagcor
999jilicommunity
999Jili Community seems pretty cool! Good place to connect with other players. Let’s see where this goes! Community time! 999jilicommunity
mitolyn
**mitolyn**
Mitolyn is a carefully developed, plant-based formula created to help support metabolic efficiency and encourage healthy, lasting weight management.
boostaro official
**boostaro official**
Boostaro is a purpose-built wellness formula created for men who want to strengthen vitality, confidence, and everyday performance.
aquasculpt
**aquasculpt**
aquasculpt is a premium metabolism-support supplement thoughtfully developed to help promote efficient fat utilization and steadier daily energy.
mounja boost official
**mounja boost official**
MounjaBoost is a next-generation, plant-based supplement created to support metabolic activity, encourage natural fat utilization, and elevate daily energywithout extreme dieting or exhausting workout routines.
prodentim reviews
**prodentim reviews**
ProDentim is a distinctive oral-care formula that pairs targeted probiotics with plant-based ingredients to encourage strong teeth, comfortable gums, and reliably fresh breath
herpafend official
**herpafend official**
Herpafend is a natural wellness formula developed for individuals experiencing symptoms related to the herpes simplex virus. It is designed to help reduce the intensity and frequency of flare-ups while supporting the bodys immune defenses.
prostafense
**prostafense**
ProstAfense is a premium, doctor-crafted supplement formulated to maintain optimal prostate function, enhance urinary performance, and support overall male wellness.
men balance
**men balance**
MEN Balance Pro is a high-quality dietary supplement developed with research-informed support to help men maintain healthy prostate function.
neurosharp official
**neurosharp official**
Neuro Sharp is an advanced cognitive support formula designed to help you stay mentally sharp, focused, and confident throughout your day.
back biome
**back biome**
Backbiome is a naturally crafted, research-backed daily supplement formulated to gently relieve back tension and soothe sciatic discomfort.
prodentim
**prodentim**
ProDentim is a distinctive oral-care formula that pairs targeted probiotics with plant-based ingredients to encourage strong teeth, comfortable gums, and reliably fresh breath.
prostafense
**prostafense**
ProstAfense is a premium, doctor-crafted supplement formulated to maintain optimal prostate function, enhance urinary performance, and support overall male wellness.
neurosharp
**neurosharp**
Neuro Sharp is a modern brain-support supplement created to help you think clearly, stay focused, and feel mentally confident throughout the day.
nerve calm
**nerve calm**
NerveCalm is a high-quality nutritional supplement crafted to promote nerve wellness, ease chronic discomfort, and boost everyday vitality.
backbiome
**backbiome**
Backbiome is a naturally crafted, research-backed daily supplement formulated to gently relieve back tension and soothe sciatic discomfort.