The stats …
Interest on reserve balances: 4.90%
Effective federal funds rate: 4.83%
One-month Treasury: 4.56%
Two-month Treasury: 4.90%
Two-year Treasury: 3.97%
Ten-year Treasury: 3.39%
Sources: U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System.
The takeaway …
If you are asset-less, living paycheck to paycheck, your primary concern is to maintain your value as an employee and to determine whether your employer’s assets and liabilities are in balance. The ability to earn an income from your work given that you have no assets is imperative.
As an asset-less employee, you likely do not serve the banking system. You have no unencumbered assets upon which a bank can create liabilities and fund deposits with credit. The assets, if any, held by the low-income do not convert to the appropriate level of debt-wealth that can sustain the generations that the wealth is passed down to.
Also, the assets that low-income households have do not generate the future income that increases the assets’ discounted future value. A positive and increasing discounted future value decreases the risk that the bank will not get paid back. Interest rate risk decreases and asset value increases.
Banks like this scenario because increased asset values represent an increase in the value of the collateral used to secure the credit that the wealthy use to fund their lifestyles. Maintaining this value means avoiding the costs of making a margin call on the debt.
The trick for the government is that the bond market it supplies with IOUs has to generate rates that earn enough disposable income for borrowers while generating enough income to pay off interest and principal on the funds borrowed.
Why does the borrower need enough income from borrowed funds to pay off the debt? Because if the asset is not paying for itself, then the borrower will have to go to work, whether a nine-to-five or some other time-consuming tasks. She will have to ask whether it would be simpler and cheaper to acquire a level of skills that she could then use to procure employment rather than endure the hassle of making capital allocation decisions that create income from assets.
Interest rates on debt will have to be less than the yield on the debt. The borrower would have to allocate capital to the proper income generating buckets to ensure that yields recover interest and principal and the expenses necessary for sustaining her.
The irony is that the wrong capital allocation decisions could result in the evaporation of the income generating asset. The asset itself may have to be sold to pay off the debt that has been used to sustain the borrower. Failure to acknowledge the event of paying the balloon payment with the sale of the asset makes the “generational wealth” political argument proffered by some low-income and unbanked advocacy groups sound asinine.
Alton Drew
10 April 2023
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