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It was a bad day for borrowed money, and it was a bad day for former President Donald Trump.
- The Federal Reserve jacked up interest rates again, moving into uncharted territory to fight the inflationary fire previous rate hikes did not tamp down. It made history by approving a third consecutive hike of three-quarters of a percentage point.
- The New York attorney general sued Trump, his three eldest children and his business for allegedly inflating the value of his assets to get favorable interest rates from banks, as well as deceiving insurers and tax authorities.
I’m not going to argue that these things have anything directly to do with each other.
One is a policy and consumer story that affects everyone.
The other is a politics and business story about a man and his effort to make himself look rich.
But if you’re planning to write a newsletter about how higher interest rates are going to affect people and suddenly, the New York attorney general alleges the supposedly billionaire former President enriched himself through access to favorable loan terms, it is not crazy to wonder if there’s some larger cosmic point to be made about easy access to cheaply borrowed cash.
The Fed’s low interest rates of recent years helped inflate the housing market and prop up the stock market during the Covid-19 pandemic for people who could afford to buy homes or invest.
From CNN’s report on the Fed’s rate hike:
The supersized hike, which was unfathomable by markets just months ago, takes the central bank’s benchmark lending rate to a new target range of 3%-3.25%. That’s the highest the fed funds rate has been since the global financial crisis in 2008.
What it means for people:
Policymakers at the Fed want to strongly address inflation – rising costs – before it spirals out of control, but without doing too much harm to the economy.
CNN’s Allison Morrow described the Goldilocks problem of getting it just right in her Nightcap newsletter earlier this week.
“Raise rates too much, we get a recession,” Morrow wrote. “Don’t raise them enough, we get an inflation spiral (and also, ultimately, a recession).”
Fed Chairman Jerome Powell has already acknowledged the Fed’s policy will cause some “pain” in the name of achieving some kind of equilibrium.
Allegations about a Trump borrowing scheme
The pain New York Attorney General Letitia James is seeking in civil court for Trump would be punitive. She wants him to pay the state $250 million and to restrict his ability to do business in the state. She’s also referring allegations of criminal wrongdoing to the federal government.
“Claiming you have money that you do not have does not amount to the art of the deal. It’s the art of the steal,” James said at a news conference announcing the suit.
Trump, who has referred to himself as the “king of debt,” knows the value of cheaply borrowed money.
The Trump Organization was able to finance a deal for the Old Post Office building in Washington, DC, and upgrade it into a luxury hotel thanks to a loan on favorable terms from Deutsche Bank. We’ve long known the deal exempted him from making principal payments for six years. Trump sold the lease on the hotel in May, raking in perhaps as much as a $100 million in profit, according to the House Oversight Committee.
James’ lawsuit alleges the former President, his children Don Jr., Eric and Ivanka, and his company engaged in a scheme lasting over a decade to overvalue their assets and get terms on loans and insurance not available to everyone else. Trump denies any wrongdoing.
That the rich play by a different set of rules is not news, as is clear to anyone who has followed the recent stories about how the ultra-wealthy finance lifestyles with borrowed money to avoid taxes.
Millions of millionaires
Regular people might not get the terms enjoyed by people like Trump, but the stock and housing markets inflated by borrowed cash have certainly added to the number of millionaires, as CNN’s Michelle Toh writes.
As many as 5.2 million people became millionaires last year, with nearly half in the US alone, according to Credit Suisse’s latest annual wealth report.
The millionaires were helped by “significant rises in economic output in 2021, combined with ‘vigorous’ activity in their respective housing or stock markets, the bank said,” according to Toh.
The half-full view of inflation and interest rates
Now, as the cost of borrowing money shoots up alongside the Fed’s rate hike, Americans are going to be nervously watching their 401(k)s and their house values, assuming they’re fortunate enough to have either.
There is an optimistic way to view the Fed’s news, according to the University of Michigan professor Justin Wolfers. Rates are still historically low compared with the anti-inflationary rate hikes of the 1980s.
“If I called my parents and complained to them about 3.25% interest rates, they would remind me back when they were paying 15% or more,” Wolfers told CNN’s Ana Cabrera on Wednesday. “So rates aren’t as low as they once were, but this is not a new world at all.”
He also said not to expect goods affected by inflation to get cheaper.
“If some of them stop rising, that’s going to be enough to pull inflation back,” he said, arguing that post-pandemic supply chain issues still have not been resolved. It might be less painful to buy a car next year, he argued. But his optimism doesn’t extend to food prices.
“It will still be painful at the grocery store for a while, though,” Wolfers said.