From the Mercatus center. The contributions are not coordinated in any way. We wrote essays about causes, effects, predictions, …whatever we felt like, on the general subject of the implications of low interest rates and the potential for them to rise. So far, we have
the 10-year Treasury yield has fallen more as a result of business-cycle pressures and policy uncertainty than because of structural changes like demographics. Consequently, more normal levels of interest rates are likely to prevail in the future.
If he is right, he could make a lot of profit by shorting bonds. And he may be right.
There are at least five reasons for the current low real rates of interest: (a) labor force growth has declined around the world, thereby reducing the need for business and housing investment; (b) a large cohort in many countries is entering the maximum saving years immediately prior to retirement; (c) productivity growth has declined around the world, thus reducing the demand for business investment; (d) regulatory changes have increased the demand for safe assets, including those that are commonly used to quote interest rates; and (e) driven by government policies, developing and emerging market economies have become net savers instead of net borrowers since 2000. In late 2009, I noted that the decline of real interest rates had been going on for about 30 years, and I pointed to several of those factors. This phenomenon is not limited to the aftermath of the Great Recession.
Interest rates, like other prices, can change for all sorts of reasons; the implications of the change generally depend on the particular reason for such a change.
I had the same problem that Selgin had in starting the discussion with the value of an endogenous variable. I wrote,
The fiscal effect of an interest rate change depends on the source for that change. The source could be an increase in real economic growth, an increase in inflation, or an increase in the risk premium that investors assign to government securities.
“If he [Beckworth] is right, he could make a lot of profit by shorting bonds. And he may be right.”
Since Mr. Beckworth is almost certainly not putting his money where his mouth is, he probably doesn’t believe his own statement very strongly. Talk is cheap.
We killed the homebuilding market a decade ago, and since then residential fixed investment has been below the long term average by about 2% of GDP every year. Meanwhile, shelter inflation has run above non-shelter inflation since 2012. And housing units per adult sinks like a stone. But, it’s a big mystery, I guess, why savings can’t find an outlet for investment.
https://fred.stlouisfed.org/graph/?g=c3eK
https://fred.stlouisfed.org/graph/?g=c3fl
http://idiosyncraticwhisk.blogspot.com/2016/10/housing-part-183-measure-of-shortage.html
My position is Gagnon’s c as the dominant driver, as I’ve discussed elsewhere in the comments of this blog. That technology-driven story helps to explain why the phenomenon is both persistent and global.
Arnold, I can’t help thinking that while you and I reacted as best we could to the somewhat ill-posed question we were actually asked (what consequences if rates rise?), David and Joe handled the problem in part by answering a different question (why are rates so low?) instead!
Had they asked me about the cause of low interest rates, I’d have written something like what I wrote about that topic on Alt-M, https://www.alt-m.org/2016/12/01/fed-holding-interest-rates/#disqus_thread.
Trump could probably get some political points by getting an increased interest rate on US Savings Bonds for the first $10k saved, so normal folk have a bigger incentive to save.
“Saving thru a house payment”, aided by a mortgage interest deduction which pushes folk to have minimum equity, is not a good savings plan. US civilization would be better if more Americans had more savings. A higher interest rate would increase savings.
It’s very sad that low interest rates haven’t led to a lot more small business loans and more business starts. I’m pretty sure too many regulations are causing this; no good way to prove it, tho, even if true.
I tend to agree with Gagnon except:
1) Has the labor supply globally really fallen? I think the exact opposite in which the global labor supply (outside of subsistence farming) is increasing include China and India part of the the globe. Also I think of lower levels of developed world labor supply which depends on long term fertility rates which hits AD first and then the AS curve based on life cycles.
2) I agree with policies of developing nations mostly because I believe China is crowding out other investments. The US does not need many factories.
3) In terms of innovation, there is a lot of it but it is focused on tech which does not require large amounts of investments. (It does depend on VC markets but the amounts are both risky and not large.)
4) The world is safe and most nations have avoid significant wars. Military spending globally is way down and a limited nations need to rebuild. I tend to think large wars as the ultimate society creative destruction.
5) I still say the housing slowdown is based on mostly demand (or median wages really) and supply issues of regulation will have limited impact.
However interest rates may not remain this low for the next ~4 years with Trump President.