Are real rates of return negative? Is the “natural” real rate of return negative?

Here is a long and very interesting post by Paul Krugman, also referencing a recent talk by Larry Summers.  There is also this older Krugman post, and here is Gavyn Davies, and also Ryan Avent.  And Scott Sumner.  Do read and listen to these, there is much in there to ponder.  I do very much agree with the claim that lower rates of return make recovery more difficult and for the longer haul as well.  And I am happy to welcome these thinkers, or in the case of Krugman re-welcome, to stagnationist ideas.

I cannot, however, agree with the central arguments about negative real interest rates, and the necessity for negative natural rates of interest (there are a variety of interlocking claims here, so do read them for yourself.  I am not sure any brief summary can quite reproduce the arguments, which are also not fully clear).

As I frame the data, we have had negative real rates on government securities, but positive rates on many other investments in the U.S.  The difference reflects a very high real risk premium, which of course we would like to lower, and the differences also reflect some degree of investment segmentation.  The positive rates on these other investments are evidenced by recent broad stock market gains, observed rates of productivity growth (low but clearly positive), high internal corporate hurdle rates, and so on.  The “average vs. marginal” distinction is an important one, but still I don’t see how it can be used to push us away from seeing relevant real rates of return as positive.  Nor do I think monopoly is widespread enough for that assumption to be a game-changer.  Even Apple competes with Samsung and others in its major product lines.

Given the multiplicity of real rates in the American economy, I get nervous when I read about the real rate or the natural rate.  (Don’t forget Sraffa [1932] and also Arnold Kling discusses the different issue of varying rates across people.  Interfluidity questions whether the idea of a natural rate makes sense at all.)  I also get nervous when I do not see serious talk about the embedded risk premium in the observed structure of market rates.  I grow more nervous yet when the average vs. marginal question is not spelled out more explicitly.

In my view very negative real rates of return would not be a “natural rate” giving rise to full employment through a better equilibration of planned savings and investment.  Given a pretty flat employment to population ratio, very negative real rates of return across the economy as a whole would have to mean negative economic growth and other attendant difficulties.

And no, I don’t think that output shrinkage associated with the persistently negative real interest rate would be expansionary through liquidity trap mechanisms; for one thing the negative wealth effect and the higher risk premium likely would offset the positive velocity effect on currency balances.  The velocity effect on currency balances, from inflation, just isn’t that strong.  At persistent negative rates of return we are much more likely to see an interdependence of AS and AD and some kind of cascading collapse of both.  Or maybe it is simply better to say the framework has broken down than to try to squeeze one’s own predictions out of that set up.

Furthermore if you think destruction will help you ought then think that capital obsolescence will pull us out of Hansen’s long-term stagnation within five to ten years.  On top of all that, I worry about the apparent “out of equilibrium” assumptions embedded in a model that has both a) negative real rates of return on investment and b) those investments being made in the first place, given that storage costs don’t seem to be enormously high.

I don’t mean this in a rude or polemic way, but the arguments we have been reading do not yet make sense.

Here is a claim I do find possible, although it is not one I am pushing.  That would be a neo-Wicksellian argument that rates of return on capital are positive but low, and investors need low and indeed very negative borrowing rates to reflate the economy, given how high the risk premium is.  I don’t read Krugman as promoting that view (note his citation of Samuelson’s OLG model for instance), although I think that is what the argument will have to boil down to.  Otherwise it ends up being a call for output destruction, which, while I do understand how in some models at some margins that can help, I don’t think at current margins is going to be anything other than an unmitigated disaster.  Literally.

I see it this way.  If you are postulating a stagnation across the longer run, ultimately it will have to boil down to supply side deficiencies.  The simple way to explain the mediocre recovery is to tack on slow growth assumptions to the underlying demand deficiencies.  But that would constitute a big concession to real business cycle theory and it would put Thiel-Mandel-Gordon-Cowen stagnationist views in the driver’s seat, all the more so over time.  The look back to Alvin Hansen is an effort to work in some (very much needed) stagnationist ideas, while at the same time doubling down on a demand-side perspective.

That just isn’t going to work.


Paul Krugman ... Larry Summers: is this some sort of economics axe-murderer-fest?

Larry summers actually has a brain that works and understands the inherent limitations of Kensianism. Krugmsn, Reich, Stiglitz etc, on the other hand, are delusional for believing that you can create wealth by transferring it from the most successful in society to the least. The good news is that there's not gonna be a basic income. social security is already being stretched to its limits . entitlement spending is already out of control. we need to become a nation of makers instead of takers.

That's an unfair characterization of Krugman, Stiglitz et al as there is much more to the argument than simply transferring wealth from makers to takers.

As they have argued, a dynamic economy is also dependent on having a money printing machine, taxes on cheap energy, removing debt ceilings and minting a titanium coin.

And rest assured, these Kruglitz Theories are tried and tested in the bowels of academia and on the NY Times opinion pages, and not out there in that messy and unpredictable place called the real world.

ummm.... how many billions spend imprisoning the poor for economic crimes such as small time theft?

Try helping them instead of waging war on them (highest incarceration rate in the world ... land of the free my a**), and maybe they will be willing to be "makers rather than takers". As it stands, there are limited or no opportunities for too many Americans.

Where are the jobs?

Apparently, there are more than 137 million of them, right here in America.

At what point do people finally stop paying attention to Krugman?

You are reinforcing the idea that economics is "politics, with math," and that might be one theme in the above. I say might because I too must admit much is over my head.

I wonder, does any real honest economist have a "policy in face of uncertainty" answer here? If what we are doing cannot be calculated to be "best" can it at least be argued to be "a good gambit?" "A pretty good path, even if I'm wrong?" "Worth a try?"

Good question. On this long article (thanks for the warning Tyler!) I thought this was a good spot:

"while productive spending is best, unproductive spending is still better than nothing."

Savers are anti-social hoarders, but the punishment meted out to them (particularly the risk averse, which after 2008, means a lot of people) over the past five years, while harsh and unprecedented, is just the beginning.

OK, I read a little more: "Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment".

If this doesn't expose the Ponzi mentality at the very heart of Keynesian thinking, I don't know what does.

Dig into that Brian. If "bubbles," where everyone runs off to chase the investment of the hour are only figments of "Keynesian thinking," what is the converse? Does non-Keynesian thinking require a steady state economy?

I'd be tempted to think that any economy which grows beyond the rate of population increase must invent new occupations for itself. Otherwise, you do have that steady state, interest rate == population growth, world.

"I’d be tempted to think that any economy which grows beyond the rate of population increase must invent new occupations for itself."

Yes, see the current bubble, now in its third century.

I guess you didn't dig too deep then. If we'd had steady growth, without national tragedies, in those 300 years, it would all be good. This discussion though is about what you do when steady, safe, growth falters. BTW, Krugman talks about what to do when people are wrong today:

Barry Ritholtz reminds us that we’ve just passed the third anniversary of the debasement-and-inflation letter — the one in which a who’s who of right-wing econopundits warned that quantitative easing would have dire consequences. As Ritholtz notes, they were utterly wrong.

Perhaps that is another answer for "why do we listen to Krugman" guy. Who would you listen to?

Gimme a break John. The QE experience has turned a lot of heads. The Austrian sandwich-board wearers have been routed.

By whom? Certainly not Professor ZLB pushin'-on-a-string.

Nope- it's guys like Sumner appear to have been right all along.

But there is a price, and it's paid by savers. Remember the 1970s. Bad inflation. Well, the worst five years for savers (based on 1-year Treasury yields) was 1973-1977, when inflation taxed away 8.3% of purchasing power. Over the past five years, that figure is 9.4%. On trillions of dollars sitting in cash. Bad savers.

I don't follow everything Sumner says, but the idea that we can take lessons from Zimbabwe seems ludicrous. So, give whom a break?

LOL. Trenchant critique of Sumner. I suspect maybe there is nothing you could learn from him.

Now get out there and break some windows.

I'd safety hint to Sumner, if you want to convince a semi-literate US reader that "incremental changes to US policy are dangerous," don't go to something as transparent as "because Zimbabwe."

I mean, can't a moderate case for danger be made for incremental change? Or do you really have to go to TEOTWAWKI?

(Perhaps you mean that you only want a "warm" economy, and not an "overheated one"' .. but that itself might be Keynesian thinking.)

Why is no one actually discussing Cowens' post?

Because none of us would understand it even if we read all 20 links!

I think TC's tweet helps zero in on the point of this post: Of course, he far exceeds that low bar ... I am still digesting Interfluidity's post which I read last night so this goes in the queue but there are certainly many skipped steps and deep, deep beliefs about economic relationships in the posts cited at the top. I do find attempts to bring blog-academic-policy frames together in one forum heroic, painful and necessary. Some of TC "nervous" items are kind of blogosphere specific but not all of them ... so is this how a new book starts?

TC writes economics like the mathematician Jules Henri Poincaré (French: [ʒyl ɑ̃ʁi pwɛ̃kaʁe]; 29 April 1854 – 17 July 1912) wrote math: very dense, so every paragraph can be expanded into a book. Consequently he ends up either talking past his audience or over their heads. I think his argument is part strawman, part talking past his intended audience, part brilliancy, and I do understand this part: "That just isn’t going to work." Got that right TC! Cuz eye aint deciphering all that prose!

Back from the days when Tyler posted more about entertainment and less about healthcare and Krugman.

I think summers makes an important point by using a shutdown of electricity (energy) in his example. As he points out people under estimate the importance of energy supply and costs in the economy. First things consume energy and then they grow. Plants, animals, people, businesses and economies. Here is a sankey diagram of the U S economy showing how dependent we are on energy, especially oil. Our energy consumption has dropped from 98 Quads in 2010. World oil production has stagnated since 2005 despite a tripling of its price. The price of oil especially has become so high it has crippled economic growth at least in the OECD countries. Developing countries can afford to pay more because an incremental barrel of oil offers greater utility to them. We need to connect economies to biophysical realities and I think Summers gets this. Here is a good book on the subject As energy becomes even more expensive in the future this could eventually cause negative growth and hence a more negative interest rate environment. These may be the good old days.

Energy has not grown more expensive. The currency has grown more plentiful. Oil priced in other commodities has remain relatively stable for a long time. It is why I have always liked the idea of a reserve currency tied to a basket of energy products. For the parts of the world that matter, energy is the de facto currency. May as well make it de jure.

jim + Z = +1

What biophysical realities are you referring to in this post? I think of protein dynamics when I hear biophysics...

Energy, especially oil, has become more expensive over time in terms of Energy Return on Energy Invested (EROI). We have already picked much of the low hanging energy fruit. The primary Biophysical reality is Thermodynamics.

Sure, but it isn't like there was ever a fixed relationship between energy and economic output, or between energy and happiness. Consider the lowly iPad. It is a low power device. If stays on the couch and uses it (1) one is not driving anywhere for books or movies, (2) the user is likely leaving their higher energy computing devices turned off and powered down.

This is an accidental win ... maybe, or mostly. But as when the iPod displaced the 300 watt stereo, it is move to lower power entertainments.

John - You make good points. Energy efficiency and conservation are excellent sources of low cost energy (negawatts)...but there are thermodynamic limits. Also, it still takes energy to manufacture things and move people and freight according to the first law of Thermodynamics. I also agree with your energy and happiness comment. eg. I am very happy while riding my bicycle. We need to use a different success measure than GDP growth.

Americans have been spending a smaller portion of their income on energy, despite the fact their purchasing power has been systematically eroded. My first car got six miles to the gallon thirty years ago. My current gas guzzler gets four times that number. That's why a currency based on energy would be a boon to the average human. That's also why it will never happen. Robbing people through currency devaluation is the third oldest profession.

If the kids stay home and tinker more on internet blockbusters, are they wrong and is that a tragedy for future US economic growth?

(I think it is possible that the kids are prematurely running from high energy projects, but it is also possible that they are exploiting the most exciting new field. I mean, AirBnB? That's still low hanging fruit. That isn't rocket science (good solid tech, but assembly, not invention).)

It's a little early to be drinking, isn't it?

Come on, try again. Industries vary in energy intensity. The kids are migrating to low-energy-intensity fields. True, right?

It might be an interesting argument to claim that US energy efficiency drives were premature and that we should just be consuming more, even at these costs, but I don't see that. If anything business, with an accounting view, has been very aggressive in energy efficiency because it does improve the bottom line, and apocryphal Hummer driver still consumes to demonstrate fitness.

As another engineer, I find your post kind of imprecise. ;)

However, you do make a good points.
" The price of oil especially has become so high it has crippled economic growth at least in the OECD countries."

For reference:

However, the price of natural gas is counteracting that to some degree:

I foresee a transition of the US transportation sector to a heavier reliance on Natural Gas over Oil. There are few economic or technological reasons why we can't use Natural Gas for heavy truck, sea and rail shipping.

"We need to connect economies to biophysical realities." This sounds like a buzz word. What does it really mean? Do you just mean that fossil fuels will eventually run out? If so, you should try and avoid buzz words that obscure the real meaning of your writing. If you mean something else you should define what you mean.

"Developing countries can afford to pay more because an incremental barrel of oil offers greater utility to them."
There's probably some truth to that.

"As energy becomes even more expensive in the future this could eventually cause negative growth and hence a more negative interest rate environment."

It seems unlikely that energy will become much more expensive in the future. We'll just substitute forms of energy. The US is well into the process of substituting natural gas and wind power for oil and coal. Most of the new energy investment in the US over the last 5 years has been in those two forms of energy. And it's unlikely that wind will get more expensive in the future.

Indeed, the average cost of wind electricity production will decline drastically as the turbine fleet ages. Yes, I know this seems counter-intuitive, but none-the-less it seems to be likely. To explain: the current costs of wind turbines are tied up in a) developing a physical location (property leasing, road build out, electrical transmission connections, taxes), b) building and installing the concrete pad and the tower and c) building and installing the turbine and the rotor/blade assembly. Out of those costs, there are three costs that dominate in the long term (20 to 100 years), those are: property leasing, taxes and turbine replacement. Since those costs are less than half the cost of a new turbine, you can expect aging turbine fields to generate power very cheaply.

JWatts Good comments. Biophysical realities primarily means dealing with the diminishing EROI of fossil fuels ultimately making them uneconomic to extract. Taking the would never invest a barrel of oil to extract a new one.
Also, thermodynamics limitations where it takes energy to do work and energy consumption growth for economies to grow.

I agree on wind energy but we have a long way to go developing renewables in order to replace fossil fuels as the Sankey diagram shows.

As for shale gas and oil I am not so confident it will be around for a long time as discussed in this article.

I think the risk premium/"animal spirits" explanation for low investment make sense, but to what extent is the risk that of continued weakness in nominal demand? In Sunmers' terms, the risk is that the Fed's ngdp policy target will be too low and with downside risks?

OK, I don't understand economics well enough to follow most of the argument above. So I will interpolate the best I can and ask for help.

PK says (sounding text-book-ish) that the "natural" rate of return is "... the rate at which desired savings and desired investment would be equal at full employment ..." (emphasis mine).

In other writings, TC talks about zero-marginal-product workers and other tales of low productivity. So given the above definition of the "natural rate", doesn't the full-employment constraint mean somehow paying for those workers? If so wouldn't that come out of profits, and thus explain the negative real return?

Today, one shouldn't think of only the US. The capital and product markets are pretty integrated. All countries bond issuance and purchases contribute to the risk free (or low risk) real interest rate. There are dozen or so large countries with government bond markets that are nominally risk free and that have a stable enough inflation and exchange rate to be low risk. Also, the demographics and productivity growth in all the countries in the world contribute to the global low risk real interest rate. I think it's a mistake to think about the US in isolation here.

Sometimes the more technical macro-economists (Usually Keynesian of some flavor), fall in love with their model of how the world works and forget that their model doesn't actually represent the world as it is, but an idealized representation embodying their assumptions about the world.

This can lead them to incoherent conclusions that if they took a step back from and looked at the world as it actually is, comparing their results to something more empirical, might cause them to not believe the results of their model. Macroeconomic models can be useful for understanding specific points better, but they tend to break down when stretched to try and reflect a larger picture, which by necessity has to accommodate more variables.The real world has many more variables and isn't so easily simplified. That's the reason macroeconomic models can be useful, making it easier to think about a complicated world in simpler terms, but at the same time, because they are much simplified, they don't actually describe the world as it is, but rather, as it would be if you simplified everything away based on the modeler's assumptions.

In this particular case, I would argue that one of the biggest flaws in Krugman's mental model of the world is the persistent myth that "full employment" is a primary goal we should be concerned with. Building wealth/economic growth overall is the primary goal. If we could live and grow our wealth by 5% a year while no one at all was employed (Postulate robot workers, or some such), that would be much preferred to our current situation.

In any case, it sounds like Krugman is saying, "Look, my model is producing some wacky results, so we need to do some wacky things in the real world in order to make the world behave how my model predicts it should!"
I suggest it's more likely his model is wrong....

Sometimes the more technical macro-economists (Usually Keynesian of some flavor), fall in love with their model of how the world works and forget that their model doesn’t actually represent the world as it is, but an idealized representation embodying their assumptions about the world.

This is true in other disciplines as well.

But the challenge for alternative models - Austrian, post-Keynesian, etc. - is not to merely correctly fit the areas where the orthodoxy fails, but avoid generating any additional failures themselves. It is that hurdle which is especially difficult to vault.

This makes no sense. The basic Krugman assumption is that overall prosperity is only maximized at full employment. Stepping away from the model this is the only sensible conclusion. If a person can be productively employed then that production will be added to the economy.

If you want to argue that most of the unemployed are ZMP workers then that is fine. But, that is not an argument against full employment but an argument that we ALREADY are at full employment. This isn't even an area where there are disagreements amongst various models.

Now you could be saying that the emphasis is wrong and that we should emphasize prosperity and not employment but that is a semantic distinction. Full Employment by definition is a prerequisite of maximizing prosperity.

All along the models have been based on a whopping assumption, namely a definition of full employment that rules out the possibility of ZMP workers? Very interesting.

When you have minimum wage (and other minimum benefit) laws, then quite obviously there are a significant chunk of ZMP workers.

How much of stagant growth is caused by Krugman's point on Japan in 1997 and 1998? Low birth and population rates. With aging populations and less children, doesn't this create a huge liquidity trap where there is more savings than needed investment?

It feels like we are in weird trap that a country must have a low (or falling) birth rate to be funcitonal and competitive yet in the long run this will lower long term economic growth. (Outside of Israel name a very competitive nation, without be an obvious petro-state, with a high birth rate.) How do you expect the working classes of developed nations to have more children when there wages are not increasing? People are taking austerity into their families.

You are assuming the causation is low birth rate --> competitive economy. More likely, the causation is the other way around, or a third factor (higher intelligence and education) causes both.

If your theory is true, it's a whopping example of sacrificing long-term growth for short-term growth.

One of the big reasons birth rates are low, in turn, is that real estate prices relative to wages are too high: not enough housing is being built where the jobs are. Psychologically at least, most people need room to raise children, even more than they need money.

The only way to achieve full employment is to get the government's boot off of the economy's neck. Of course, Th, er Krugman, Stiglitz, Thirdreich et al. are socialists, so they don't want to do this.
Y = C + I - (G + T).

If real returns on government treasuries are negative, then it is time for businesses to start opening up the war chests, no?

I would like to interject another item of [partial] wackiness into the discussion. When Krugman, Keynes and others discuss burying money or breaking windows, the closest analogies a biologist such as myself can conjure are:

1. substrate cycles (aka futile cycles)
2. cryptic growth
3. parental cannibalism

In each of these cases, a high investment is made and subsequently destroyed. In some cases, part of the value is recovered, from our perspective.
It is my opinion that better biology can be used to inform when such 'futility' might be useful in economics. Parental cannibalism suggests, for instance, that sometimes when
productivity is difficult to regulate and anticipate - long lead times, for example - that starting a big infrastructure project is necessary even if there may not be a need for it
in the end. The 20 years it takes to complete the project is the overriding factor, socially. Or it may be necessary to hedge by starting the same project twice.

The middle case, in which bacterial grow on the breakdown products of related cells, may be one of several scenarios. Perhaps the bacteria are not truly identical - selection
is at work, not futility. Or perhaps cryptic growth only occurs in maladaptive situations, or as an answer to imponderable environmental fluctuations (again, better to overshoot).
Or perhaps the excess initial growth actually locks up resources a competitor might have appropriated. I'm not sure we have a good general answer, explaining as a unified whole
what may be diverse.

Futile cycles, on the other hand, have already been partly explained as a regulatory process - like antagonistic muscular activity, it allows for rapid adjustments. In other cases, it actually
produces heat as a valuable byproduct. There may be other cases and uses.

Without aggressive 'central planning' some of these may naturally occur in the economy; certainly, with planning, they do. These cycles appear as waste but may not be so.

Tyler's right about asset segmentation. The natural rate on government securities is undoubtedly negative thanks to risk premia, but that doesn't mean private rates of return are negative. AAA seasoned corporate bonds haven't dipped below a real rate of 1% calculated from TIPS breakevens:

Natural real rates are low in the private sector, most likely for TGS reasons, but not zero. I would have to see zero real rates on AAA bonds corporate bonds before being convinced that corporate investment will be permanently moribund without negative real private rates. Wireless companies haven't yet finished 4G networks or built 5G networks currently in the planning stages. Solar panels without subsidies already have a ~15 to 20 year breakeven period versus fossil fuels in a lot of the US. Analagous to Bernanke's example, that there's always a hill to flatten to reduce a railroad's fuel consumption, we now have capital goods that substitute for fuel altogether. At truly zero rates, the discounting horizon pushes out beyond 30 years, rendering solar cost-competitive just like Bernanke's railroad improvement.

So, get back to us on those negative natural private rates when we've all got wireless broadband and ubiquitous renewable energy.

Point is: real rates haven't gone negative for the private sector, and if they went anywhere close, there are a lot of private projects with positive returns still out there to exhaust before hitting zero. While the natural risk-free rate on government securities is surely negative, we cannot yet conclude the same is true for natural private real rates on the basis of current evidence.

Point is: real rates haven’t gone negative for the private sector, and if they went anywhere close

+1, there are trillions of dollars worth of productive economic investments at very low corporate borrowing rates.

Isn't that backwards? Are you not saying something akin to "There are trillions of dollars worth of productive investments out there where you can lose money"?

Money isn't free, in spite of what the Fed is saying. Anyone who needs a return to function; pension funds, insurance funds cannot afford to invest at zero or negative rates of return. Remember inflation is 2% or so.

What Tyler is saying is that to get a minimal return on your investment, say 3% over inflation, or 5% nominal requires taking on a very large risk, in return for very little. To get a return that can pay something, like pension obligations, require 5 or 6% above inflation, and you are getting into seriously risky propositions.

So we have two ends of the same scenario. One group invests to not lose. They go for the 2% low risk stuff that builds nothing. Essentially investing in retired folks hip replacements through government, or the padding of some large corporate balance sheet who hasn't hired in a decade and whose good ideas have been all bought for the last two decades. Safe, no risk, but stagnation.

The other group invests in ways that are risky but give some return. Stock market, carry trade, whatever. These are the things that moved sharply when Bernanke vaguely mentioned the T word.

Isn’t that backwards? Are you not saying something akin to “There are trillions of dollars worth of productive investments out there where you can lose money”?

No, I'm merely saying that there are trillions of dollars worth of productive investments for corporations with a lower Hurdle rate.

Remember inflation is 2% or so.
I'll point out that corporate bonds are paying over 3%, so there's certainly some room to drop. Indeed, corporate borrowing rates are on par with 15 year home mortgage rates.

Also, I suspect that corporations could drop their internal hurdle rates and would if the path to future growth looked more robust. I have clients with a hurdle rate of 14%. That's quite a spread.

So we have two ends of the same scenario. One group invests to not lose. They go for the 2% low risk stuff that builds nothing. Obviously this is the target group for corporate bonds. Though a corporation can and many times should issue more equity to finance internal improvement projects.

If an industrial customer can purchase a high efficiency boiler that has a IRR of 12% for a large, profitable plant then it probably should. Particularly, when borrowing costs are low.

If you've already got a furnace, the IRR on replacing it is nowhere near 12%/year. The technology is improving far more slowly than that. Most of their parts don't wear out and the ones that do can be easily replaced. Furnaces from 30 years ago are practically as good as those today.

This is Ryan Avent's graph in real as well as nominal terms. It paints a rather different picture.

I haven't tried an image here before. If it doesn't work, use the URL

I think inflation compresses risk premiums and when it diminishes, risk appetites are also diminished increasing the spread, so this is just another cost of (the lack of) inflation that current models miss.

Isn't the argument that if real rates of interest in government borrowing are negative then even useless projects will have a positive return. This is at the heart of stimulus reasoning. Put me down for preferring a massive tax cut assuming that the positive real rate of return in the private sector will channel the money to the most productive use.

Borrow money to be monetized by the fed. Give money to Americans. Continue until inflation forces fed to alter ZIRP. At that point any future borrowing distorts private sector. Is this really that crazy. If people are wrong and we are close to full employment or the natural rate is above zero for even the government then interest rates will respond quickly and the program barely starts. But if Krugman, Sumner, and others are right we get an employment boom first and a good economy.

Interfluidity questions whether the idea of a natural rate makes sense at all.

Indeed. And inflation is in the eye of the beholder (well, the bespender).

So maybe the better question might be: why are nominal rates low? It looks like what Fisher and Friedman predicted -- after building up 30 years' worth of credibility for 2% inflation targeting, the Fed has created long-term expectations of low inflation.

The markets' unusual sensitivity to monetary policy is starting to seem eerily normal...

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