A Fed rate cut makes borrowing cheaper, and the people closest to the new money benefit first. Everyone else gets the higher prices later. In Episode 008, after Jerome Powell announced a quarter-point cut, Nicky P, Luke Tatum and Rob Brayton explain what the federal funds rate is, why higher rates tend to bring prices down over time, and why they'd rather rates stayed higher.
“It’s practically bribery to cut rates that much.”
The President wanted a bigger cut. Jerome Powell delivered a quarter point. Rate cuts get talked about at work and on the news as if everyone already knows what they mean, so this episode starts with the basics and then follows the money to see who it reaches first.
What We Covered
What the federal funds rate is. Rob explains it as the target rate banks and other depository institutions charge each other for overnight loans to meet their reserve requirements. It shapes what banks pay on deposits and how cheaply employers can borrow to expand. When money is cheap, businesses grow. When it isn't, they pull back.
“Practically bribery.” Luke would rather the Fed left rates alone, or let them rise. Cutting toward zero is popular because it feels like free money. Nicky notes we've spent decades near zero and had barely started to climb back to a real interest rate. Luke's line from libertarian circles: you raise rates so you can cut them. When he was born at the end of the 1980s, the fed funds rate was around 8.5%.
Higher rates, lower prices. Rob remembers his parents buying their home in the 80s, when rates were high. Higher rates make payments harder, but they slow inflation and over time drive prices down. Luke explains why: people buy less on credit and save more, so whoever sets interest rates is also steering the savings rate.
“Interest is just the price of time.”
Malinvestment and the Cantillon effect. Nicky describes malinvestment, the Austrian term for what happens when artificial incentives send money to the wrong places. With money losing value, you're pushed to spend now. Luke explains who benefits: the politically connected and the well capitalized hear first and act first, while new money raises prices as it moves through the economy. By the time it reaches you, you're holding the bag. Nicky calls it insider trading at the Fed level.
Why push for a bigger cut? Rob points to the midterms, since a hotter economy tends to help the party in power, and to complaints that everything costs too much. Nicky asks whether cuts help cover the cost of tariffs. Luke adds that cheaper credit, like Affirm, Klarna and retail cards with six or 12 months of no interest, hides higher sticker prices.
“So we need a real market interest rate and that would be much higher.”
The private banking space. Luke describes two systems: public banking, where your checking and savings accounts sit, and the private banking space of life insurance companies, which he describes as 100% reserve. Interest is the price of time. Insurers are some of the biggest bond buyers there are, so longer periods of higher rates let them lock in higher-yielding bonds. That supports the dividends a mutual company pays its policyholders, who are part owners. Luke's Mises analogy: the wrong interest rate is like a doctored blueprint, and you build 90% of the house before you find out you're short on bricks.
Rob's numbers. Rob says the contractually guaranteed growth in a whole life policy gives his family stability and dry powder for a downturn. By his math, he would have saved more than $61,000 on two vehicles if he had set up the system sooner.
Real estate and cheap money. Luke adds one more thing. If you don't like multi-billion-dollar firms buying up homes to rent out, you should want higher interest rates. Cheap money is what makes those purchases easy.
Key Takeaway
A rate cut is a gift to whoever borrows first and biggest. If your savings sit in a system where money isn't created out of thin air, higher rates stop being only a cost and can start working for you.
Key Moments
[1:00] What the Federal Funds Rate Is
[3:00] Raising Rates So You Can Cut Them
[4:00] Higher Rates, Lower Prices
[6:00] Malinvestment
[8:00] The Cantillon Effect
[11:00] Why Trump Wanted a Bigger Cut
[13:00] The Private Banking Space
[16:00] Mises and the House Built on Bad Signals
[17:00] 100% Reserve and Dry Powder
[19:00] Real Estate and Cheap Money
“If you’re not a fan, then you should want higher interest rates, right?”
Related Episodes
Episode 004: Is the Fed's Dual Mandate Failing America? Jerome Powell, the 2% Inflation Target and the Volcker Era
Episode 007: Why Record Stock Market Highs Don't Mean a Healthy Economy
Episode 047: What If Rates Never Come Down? The Big Short Lesson Behind "Buy Now, Refinance Later"
Want the full conversation, including Luke's Mises house analogy? Listen to the full episode and grab the free toolkit at PerfectSpiralCapital.com/podcast.
FAQ
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It's the target interest rate that banks and other depository institutions charge each other for overnight loans, usually to meet reserve requirements. The Federal Reserve sets the target, and it ripples out into deposit rates, loan rates and how easily businesses can borrow.
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Whoever is closest to the new money: large banks, well-connected investors and big borrowers. This is the Cantillon effect. New money raises prices as it moves through the economy, so the first people to spend it pay today's prices and everyone further down the chain pays higher ones.
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Over time they can. Higher rates make borrowing more expensive, so people buy less on credit and save more. That tends to cool inflation and bring prices down. Payments feel harder in the moment, but savers earn more and things become more affordable.
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Life insurance companies hold large bond portfolios. When rates stay higher, they can buy higher-yielding bonds, which supports the dividends mutual companies pay their participating policyholders. Dividends aren't guaranteed, but a properly designed whole life policy also carries contractually guaranteed cash value growth.
Show full transcript
Between The Lies: Episode 008 Transcript
A Quarter-Point Cut [0:00]
Nicky P: Despite the president's urge to take advantage of the unprecedented prosperity around us, wink, and make a larger cut, Fed Chairman Jerome Powell announced a quarter point cut today. Welcome to the Between The Lies Podcast, your weekly lesson on how to approach an uncertain world with positivity and balance.
I'm Nicky P here with my good friends and money brains. Luke Tatum and Rob Brayton from Perfect Spiral Capital. Stick around until the end of video for their free toolkit and be sure to like and subscribe if you enjoy the video. Gentlemen, are you excited?
Luke Tatum: You know, I'm so excited. I gotta tell you.
Messing with the interest rate, there's nothing more exciting than that, right? So, I thought we might start this one by just sort of talking about what we are actually discussing today. I feel like Fed rate cuts are a thing that get thrown around all the time, and you maybe hear that at work or something and go, ah, what the heck?
That's one of those econ things. Don't really think about it. Rob, would you maybe break this down for us? Tell us what this actually means.
What the Federal Funds Rate Is [1:00]
Rob Brayton: Yeah, sure. So the federal funds rate, as you mentioned, Luke tends to get thrown around a lot. People are always worried about this or that. Reality is it's a really a target interest rate that the US banks and other types of depository institutions charge each other for overnight loans, for reserves, different capital to meet their reserve requirements.
And that's really all it is. And it's at the same time though, it does have some larger bearing on the economy because we have. Banks making these decisions based off of their access to capital. These reserve funds, they tend to adjust their deposit rates and lots of other things based off of those that rate, and then it also trickles down into the access to capital for employers, right?
So depending upon that funds rate, they, if money is really cheap, they're gonna try to expand and try to grow. If rates are higher, they may try to scale some of that back a little bit, but. Yeah, so that's in a nutshell, that's kind of what it is and where it comes.
Practically Bribery [2:00]
Luke Tatum: Awesome. So. You know, my first take on this is I wish they'd leave rates alone and like let 'em rise more and all that.
But that's a very unpopular thing to say. I know Trump is very upset that we're not cutting more, right? It's very politically popular to cut rates all the way to zero or near zero, because you're giving away money. It's free money. It's practically bribery to cut rates that much.
Decades Near Zero [2:00]
Nicky P: So let's. Because most people, I'm sure have no idea at all, like, what's going on here.
Let's kind of talk just a moment about the bigger macro scenario that we find ourselves in. We are in a place where historically, like we've had rates that go up and down. We are now in a place where it's been decades where we haven't had. A real interest rate. They've kept it near zero, Sub-Zero, right around zero for an incredibly long time.
And as we're just starting to claw back an actual interest rate, you know, we're already dragging ourself back down because, you know, we're doing so well that we have room to claw back. But it's, you know, just that claw back to keep us right to that zero bound marker. Right.
Raising Rates So You Can Cut Them [3:00]
Luke Tatum: Right, right. You've gotta have some room to go back down.
And so this is kind of a joke in libertarian circles sometimes it's like, you know, the whole reason you're raising rates is so you can cut 'em, right? The Fed, that's their main action mechanism. Oh, economy bad. Reduce interest rates, right? It's gonna stimulate the economy. We've all heard that we're gonna stimulate the economy.
You know, what was it called? Quantitative easing. Right? We're going to ease up on the economy and make it easier to do business and stuff. We're gonna print new money, we're gonna lower rates, right? And so, it's, it can be very frustrating seeing this when you look, I mean, when I was born, right?
I'm a very, very end of the eighties kid, right? And so the Fed funds rate was eight and a half in that neighborhood, like the day I was born. And so. That's a lot higher than three and a half, or, you know, 3.75, 4.
Higher Rates, Lower Prices [4:00]
Nicky P: When's the last time we had a rate that high that you can remember?
Rob Brayton: I was alive when it happened, but I was so young I didn't know anything about it.
I know my parents had to deal with it right when they bought their home in the eighties and when bought their property. But there's. What most people don't realize is there's also a side effect to those rates being higher, and that's lower pricing and that's kind of the big thing that most people are facing right now.
And it doesn't mean that those two things always go hand in hand. We also have that other, you know, elephant in the room, which is inflation, and we haven't properly adjusted for that with the rate or the money supply or all these other things. So, yeah, I mean, there's a lot that goes into it. But to try.
For people to understand. Generally when rates are higher, inflation does slow down and, and that's a good, that actually is a good thing for the average person. It doesn't feel like it because if you go to buy a home or you're addicted to financing through a third party bank, well yeah, those things aren't, the payment is more expensive, so it becomes harder to afford, but it does in the long term, drive the pricing down.
And things do become more affordable in some respects.
Rates and the Savings Rate [5:00]
Luke Tatum: And why? Why does that happen? Because people don't buy as much, right? People are forced to restrict and to get into more of a savings mode and to not. Get thing today, pay later. Right. It shifts consumer behavior and that's, I mean, that's why it's bad to have a central authority dictating what interest rates can be because they're in some sense dictating what the savings rate is, you know, not directly.
It's all very indirect and obfuscated and very confusing and, you know, it gives them sort of a benefit of the doubt out to every conversation. But that's what they're doing.
Malinvestment [6:00]
Nicky P: The word that we use, you know, in Austrian econ is malinvestment. It's, we've created a, an incentive in the environment that's inorganic, and that inorganic incentive is now.
Causing things to function, not as they would in a normal event when things are running properly, but in an artificially induced state. And the, you know, the idea of the government is that it's their job to artificially induce whatever state they want. The problem with them doing that is that it the longer and longer things go on.
In that state, the less close to reality and how things actually are supposed to move and would in any normal setting. Yeah, they, we, they don't care if people save because they can care less How hand to mouth, everyone in the country is like, in fact, it's better for them if we're all hand to mouth and have to ask them.
Whereas for you, it's better if you don't take the easy money and you do things. But most of us are in situations where it's. It's difficult to make that choice some days, certainly when you know money's gonna be worth less tomorrow because of inflation. You're incentivized to spend all you can now. So it's weird how, to me, you know, it's kind of like the non money guy, how they make all these decisions to try and force.
Us to do things that are good for them and like surviving the next day for them, but not good for us.
The Cantillon Effect [8:00]
Luke Tatum: And when we say them, I mean, it's like you're more a part of the them crowd. The closer you are to the immediate. Like center of political power, right? So the politically well connected, you know, they may have already known that interest rates are about to get cut.
They may have already made their decisions based around what's about to happen with these sorts of things. And so if you're on the leading edge and you've got the money to deploy and you're well capitalized and you're ready to go and you can adapt when the Fed announces a interest rate change, you get to have benefits that other people don't, right?
And so again, do what?
Nicky P: I don't know what word you're looking for. I'm sorry.
Oh, Cantillon. Cantillon. Yeah.
Luke Tatum: Yeah, yeah, exactly. And so, I mean, and, and it's true, right? It's absolutely true. These money goes through stages, right? If the Federal Reserve goes and buys a bunch of stuff directly, they write a check on the Federal Reserve to buy something. Well, they're paying the price that's current, right?
But that creates new money. It inflates the currency, makes money worth less. The next guy, whenever they get the check, when they cash the check and receive the money, they're spending it in a different price environment, right? And so when we, you or me, when we're 14, 18 stages down the chain, we're always getting, you know, we're always holding the bag, we're always left getting the worst into that deal.
Insider Trading at the Fed Level [9:00]
Nicky P: You wanna ask the question if you like my position. Well, so what if I were to take. Information that I have and go and make a bunch of huge financial decisions and move money based on this knowledge that I have that nobody else has. We call that insider trading. But when you do it at the level of the Fed and you know, let's say the level of the banks that are in that circle that probably already know this stuff, 'cause they're all having these discussions together at the same parties, it's somehow not insider trading at that level.
It's just. Business as usual.
Luke Tatum: Policy decisions, policy meetings, policy briefings. Exactly.
Nicky P: You know, it's certainly frustrating to be, I guess, you know, that far away from like where the money actually holds its value.
So what is the difference between like, you know. Trump would've liked, I believe a much larger rate. Cut versus the point, you know, quarter point cut that we got today. What is, what are the differences if that happens?
Why Trump Wanted a Bigger Cut [11:00]
Rob Brayton: I mean, your access to money becomes less expensive, right? So it artificially stimulates the economy to grow, which I ultimately is really what I, where I think a lot of it was leaning because.
My assumption, and I mean, I'm not a political strategist, but I think I've been around long enough to kind of see things, what's coming up relatively soon, midterms. Well, if the economy's going well, it helps reward the party that has the power. Generally speaking, economy tends to dictate how people vote in a lot of cases.
Not always, but it tends to. And I see it as well if I, if we can get the economy to churn a little faster, do a little better, it looks really good at the time. Midterms come around now. Is that the only reason? I don't know. The other part of it is probably he's getting a ton of kickback and feedback from people that things are really expensive and we don't have enough money.
Assuming that, you know, if the economy ticks better, employers will trickle and somehow pay more money to their employees. Maybe, that, that tends not to be the case in a lot of situations, but I think that's where the motivation for a larger rate cut is likely coming from.
Covering for Tariffs [12:00]
Nicky P: Do you think that a lot of this is him trying to cover up the negative effects of tariffs?
Rob Brayton: It's very possible, right? Like that's how you would balance some of it? For sure. Very true.
Luke Tatum: It's okay if the thing is more expensive on the sticker because it's gotta cover the tariffs now. And of course we know consumers pay tariffs as long as you get to stretch the payments out over time and use Affirm or Klarna or, you know, whatever, and, and not actually feel the full brunt of that upfront.
Well, it's expensive, but at least it's only. Whatever percent on the, on the loan, you know, retail credit cards, things like that. You know, they have insanely high interest rates, but this all will allow them to extend their generous, like no interest terms. Oh, we'll do a six months no interest. We'll do a 12 months, no interest deal.
And then, you know, you get to kind of, it's not really kicking the can down the road, but it's like. Luring you in to doing things you wouldn't otherwise do, which is the whole game of politics. I guess in a, in a nutshell,
Nicky P: Now, obviously part of the show is how we do things different, how we kind of try to avoid the effects of, you know, big decisions like this.
So what does that look like for you guys?
The Private Banking Space [13:00]
Luke Tatum: Yeah. Gosh. I'll take a quick stab at this, Rob. I'm sure you have things you wanna jump in with, but the, the interest rate, I mean, I said at the beginning I would've loved for it to keep going up. You know, we. Are in the private banking space, right? There's the public banking space, which everyone uses, checking account, savings account, local bank, and then there's the private banking space.
And private banking space is insurance companies, and that's a hundred percent reserved. They're not making money outta thin air. It's all accounted for. It. Know you pay interest to use the money, but it's not, it's not devaluing the overall currency. You're not paying a hidden cost later, right? And so. And it compounds all the time.
'cause in, I mean, interest is just the price of time. And so we're operating in the private banking space with insurance policies. And the more time that interest rates stay elevated, the better these insurance companies are gonna be positioned. My deposits, and I use that term loosely, it's not deposits, we're not allowed to use banking lingo, but the longer period of time that these insurance companies have money sitting in their accounts, premiums coming in, and the interest rates rep, the more time that they're gonna lock in high interest rate bonds.
They're the best bond brokers on the planet, and they're gonna be getting a nice, big, healthy portfolio and turning over their bonds. Getting nice high interest rate, you know, guaranteed product under their umbrella so that they can pay healthy dividends to their clients, they can expand, right?
And I'm here for that because I own those companies. I'm one teeny tiny little portion of the ownership of those companies, and I get paid for that. I get a dividend when they make money. And guess what? They make money. So, I'm all about it. I wish that we would keep things a little higher. It's okay for interest rates to be higher if you're making wise decisions with what you're doing, right?
Mises and the House Built on Bad Signals [16:00]
Luke Tatum: I don't need free money all over the place that has all kinds of bad incentives that we've already talked about. I just want there to be a well coordinated, genuine economy, to use the. Example that Ludwig von Mises, you know, talking about Austrian economics, right? Mises would say if you have the wrong interest rate, it's like you're building a house, but there's improper signals, prices of things.
Interest is a price. Prices of things are telling you that you need more wood over here and you need more stone and you need more bricks. You need different amounts of stuff to make this house than you actually need. And then you build 90% of the house and then all of a sudden. You don't have enough bricks.
Well, I planned this whole thing out. I have a blueprint. What's going on? Right. It's 'cause you don't have the right blueprint. Somebody's been messing with it. You know, somebody came in with an eraser and messed stuff up and you're like, well, I can't finish. It's 'cause the interest rate is wrong. Right.
So we need a real market interest rate and that would be much higher. It's my opinion. What do you think, Rob?
100% Reserve and Dry Powder [17:00]
Rob Brayton: Yeah, I mean, there's.
How people feel in these situations. They probably don't care a whole lot whether the interest rate is up or down the average person. And that's fair. Like, I get it. But they do notice it when they do go to purchase things. And I would say that if we had a higher rate, I actually do think it would be much better for the average person, even though they don't, it doesn't feel like it would be a good thing.
But I think more importantly, the reason that. You know, you, myself, others, that, that practice this concept. The reason it's less of an impact to us is that just like you said, we are operating in a hundred percent reserved situation and that creates a lot of stability and there's a lot of contractual guaranteed growth that's taking place in the place where we're depositing, you know, through premiums, depositing our money and it's growing all the time, and.
When that company, as you mentioned, is performing more effectively each and every day, it just benefits those policy holders, those additional owners in the company. And that the great part about that though is if there's some sort of downturn or there is a major issue within the economy, it positions us to have dry powder, so to speak, to be able to put into action, and use it.
That gives up. Yeah, it gives me a lot of confidence for my family. It gives me a lot of confidence for those my, you know, our clients. There's lots of things from that angle that higher interest rates actually would benefit in some respects. But it, this whole concept and having this process in place actually just made a post about it today.
Just like how much money you're able to save over time had you had these things in place is unbelievable. You know, in my situation, we would've been able to save like over $61,000 had we opted to create the system sooner, and that was off of two vehicles. So like, that's the type of thing, these are real world, real life-changing numbers that we were able to do for people.
And that's a lot of about what we do.
Real Estate and Cheap Money [19:00]
Luke Tatum: You know, and there's one other thing that I wanna say on this too, because I was just having some good conversations this morning. Like, if you don't like. All of these huge multi-billion dollar equity firms and things buying all the real estate that's available so they can turn it into rental income.
If you, if you don't like that, if you don't think that's a good thing, I'm not telling you if it is or isn't. I'm just saying if that's something that you, your gut is to say, Hey, maybe BlackRock [Editor's note: The firm usually reported buying up single-family homes is Blackstone, not BlackRock.], shouldn't own all the real estate in the world. Right? If you feel that way, you know why they can get all that.
It's 'cause interest rates are low. I'm sorry. Black. Yes. Thank you. I do that every time. It's like Arkansas and Arizona. I don't even know what the difference is. Okay. I'm kidding. I'm kidding. But if you don't, if you're not a fan, then you should want higher interest rates, right? The reason they can do it is 'cause it's practically free for them to do it in the long run.
Right? All they gotta do is get somebody in there renting, done deal. Right? You make it cost money to do real estate acquisitions. Changes the landscape a little bit. Just saying
Nicky P: Right on. Well, you actually said a lot of really good things, and even someone like me who follows you guys and knows what you're gonna say most of the time, definitely with some good insights even to me.
So why don't you tell the folks about the toolkit they can get and set 'em on their way.
Outro and Free Toolkit [20:00]
Luke Tatum: Alright. Yep. Thanks so much as always for joining us on this week's episode of the Between The Lies Podcast. If you watch the full episode, you're clearly interested in the future of money and we can help you with the future of your money, we'll demystify that for you.
Just head on over to perfectspiralcapital.com/podcast. Get a free toolkit with a whole bunch of good stuff in there to help you understand what we're talking about with the life insurance and all that, and how you can deploy that in your own life or small business. Thanks so much for watching.
