President Trump wants lower interest rates. That is natural; he is by profession a real estate developer and low interest rates make real estate developers’ lives easier and more profitable. However, when the Fed’s inflation target is 2% and actual inflation is 3%, interest rates below 5% or so wreck the economy in the long-term. There is one way for President Trump to get his wish of interest rates around 2% without wrecking the economy: he should bash the Fed until it replaces Ben Bernanke’s idiotic 2% inflation target with a zero target that means fully stable prices over decades. Real estate developers can then have low interest rates. And the rest of us can prosper, free from the fear that the inept Fed will wipe out our savings and condemn us to an impoverished old age.

Much of the discussion about interest rate targets is bedeviled by economists thinking all the time about real interest rates, i.e. rates net of inflation, rather than nominal interest rates, i.e. the rate you actually pay. That is why Ben Bernanke established the 2% inflation target in 2012; he had studied the Fed’s monetary policy at the onset of the Great Depression and had determined that, even though nominal interest rates were low at 1-2% in 1931-32, prices were collapsing so rapidly, by 25% at an annual rate at the worst, that real short-term interest rates had touched 26-27%, which he correctly identified as a significant additional factor worsening the Great Depression’s downturn.

Bernanke’s work not only identified the disease, it should also have identified the cause and the cure. By the end of the 1920s, banks had overleveraged themselves because of the Fed’s misguided easy-money policies in the 1920s boom; consequently, at the end of 1930 the moderate depression then in effect sent many of them bankrupt. The bankruptcy of around a third of the nation’s banks, together with the collapse in confidence and move of deposits to the largest banks, caused a collapse in the nation’s money supply, for which the Fed should have corrected by “quantitative easing” policies such as Ben Bernanke made famous 80 years later. Instead, not only did the Fed unknowingly squeeze the money supply, but then in early 1932 the fatuously meddling President Herbert Hoover increased the top rate of income tax from 25% to 63%, thereby collapsing confidence and investors’ “animal spirits” further at the worst possible time and causing the last most damaging leg to the depression.

That explains Bernanke’s 2% inflation target. Unfortunately, that measure took a scare story from the worst monetary episode in U.S. history, then 80 years in the past, to set policy for a period in which inflation rather than deflation was the economy’s main problem. The Gold Standard was long dead and Bernanke certainly had no interest in reviving it. Bernanke emitted a dense cloud of foggy propaganda about the dangers of deflation, but in truth, with the exception of that 6-month period in the early 1930s, deflation had not been dangerous, but rather beneficial. The 1880s, the longest sustained period of deflation in U.S. history, was a period of rapidly improving productivity and living standards, especially among industrial workers, who benefited from moderate annual price declines, since they were sufficiently in demand to prevent employers from reducing nominal wages, making them richer year by year.

Only the farmers had a problem in 1890; too many small farmers had overborrowed during the expansionist, relatively wet 1870s and were now suffering from a series of dry summers, low crop yields and an increasing real cost of debt. Dozy settlers had taken tiny farms subsidized by the Federal government far into the district beyond 100 degrees west at which rainfall is inadequate in most years to support arable farming, while the average size of U.S. farms had declined steadily from 203 acres in 1850 to 138 acres in 1890, too small for viability. The farm troubles of that period began the average farm size’s long climb to 450 acres by 1990. But even in 1890, farming represented only 43% of U.S. employment, and that percentage was declining fast.

Economists, being simple folk, believe 5% interest rates with an inflation rate of 3% are exactly equivalent to 2% interest rates with an inflation rate of zero. However, any real estate developer will tell you that is rubbish, especially a developer like Trump who cut his teeth in the business in the inflationary 1970s, when borrowing costs were 8-10%.

Real estate depends on cash flow. The rental yield on a property, once the developer has bought it, is what it is, say 4% after all costs have been paid. Though rents may increase with inflation (unless they are fixed on a long-term lease, as they often are) they will do so only slowly, to a 4.12% yield next year if inflation is 3%. A developer who borrows at 5% against a yield of 4% thus suffers a negative cash flow; a developer who borrows at the more normal cost of 7% in an environment where Treasuries yield 5% will go bust pretty quickly. Conversely, if inflation is zero and interest rates are 2%, the developer can borrow at 4% and break even in terms of cash flow, allowing him to stay in business indefinitely, and if he can borrow closer to the Treasury yield of 2% he will be nicely in profit.

On the other hand, the effect of interest rates across the entire economy depends on their real level. We have about 400 years of evidence to show what the optimal real interest rate should be; it has declined somewhat over the centuries but is certainly not below 2%. Interest rates of 2.2%-2.3% on Consols in the gold standard late 1890s Britain proved to be too low and caused a speculative bubble. In more recent years, it is now clear that the 2010s, when real interest rates were close to zero, was a ghastly mistake, for which we still have not fully paid.

All kinds of rubbishy speculative investments were made, especially in tech and real estate – does anyone think that the “pencil towers” of New York will ever make money, given the mayhem at ground level in that city? That resulted in a decline in productivity growth, falling close to zero in the middle 2010s, which was only rescued somewhat by a massive Trump deregulation in 2017-19. (Higher apparent productivity figures in the last year are due to the government statisticians having completely lost track of the 10 million plus illegal immigrants who have entered since 2021; the unemployment figures don’t record the increased workforce and the productivity data is thus dividing by too small a number.) We should therefore on no account tolerate real interest rates below 2%.

There is a simple solution, which Trump through the force of the Presidency can implement – make a cartoon full of dancing skyscrapers, if necessary, to persuade him to do so. He should demand that Jay Powell set the target rate of inflation at zero, not 2%, and undertake to match any episodes of inflation with a corresponding deflation thereafter. If Powell, won’t do it, Trump must find a Fed Chairman who will, to succeed Powell in June 2026, now not that far away. With an inflation target of zero, interest rates can easily come down to 2% on long-term bonds, making life much easier for Trump and other real estate developers. This could be achieved even more easily by going back on the Gold Standard, of course.

For the rest of us, this change will see enormous benefits. No longer will inflation average a worrying 3%-4% or more, as “spikes” like that of 2022 are not corrected for and inflation declines to 1% are met with idiotic attempts to push it back up again, as we saw in 2015-16. To reinforce the change, the “hedonic pricing” scam implemented in the consumer price index in 1996 should be reversed. Under that change, mechanical increases in microchip size are not factored into the price indices, as if doubling the size of chips produced a doubling in their capability, instead of a doubling in the dangerous sludge in the programs that run on them and maybe a 10% increase in their capability if we’re lucky. Hedonic pricing has knocked maybe 1% per annum off the consumer price index from its true level, year after year, suppressing the true level of inflation, making inflation appear lower and “real” economic growth higher than it is in reality. (If you have Quicken you can compare your grocery bills from 20 years ago to today’s and confirm this.)

With a zero inflation target and true non-hedonic price index with which to measure it, we can afford to have 2% nominal long-term interest rates and still enjoy bounteous increases in productivity and living standards. Most important, we will finally be able to rely on the value of our money for our retirements and our heirs.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)