Comments on: Low Interest Rates

By: Effem

Effem — Mon, 18 Nov 2013 15:36:47 +0000

I’m not sure rates are mis-priced. To me, real short-term rates should be about 0…maybe very slightly positive. Why should idle risk-free cash earn a positive real return? So that leaves a modest term premium for taking duration risk….seems reasonable.

By: David N

David N — Mon, 18 Nov 2013 06:28:28 +0000

RE #3: Who’s to say current prices are irrational?

By: Matt Young

Matt Young — Mon, 18 Nov 2013 03:43:18 +0000

The ten year doesnt seem far out of line with real gdp growth looking back thirty years, except that it mostly underperforms. Answer me this, what is the relationship between the ten year and yearly real growth?

By: Patrick L

Patrick L — Mon, 18 Nov 2013 02:02:56 +0000

Why should long term interest rates rise or be rising under a PSST model?

By: Various

Various — Sun, 17 Nov 2013 17:36:40 +0000

Yes, but one problem with 4. is that real estate prices are now rising, in some areas by a lot. Real estate is highly leverageable. Rising real estate prices show up in rising rent, and that suggests that CPI inflation may not be overstated. Personally I think some combination of all 4 are at work. Regarding item 1, I think the Fed does have some pull, or at least markets think the Fed has pull, which in the short to intermediate term, has real effects. An expectations game if you will.

By: Nick Bradley

Nick Bradley — Sun, 17 Nov 2013 15:47:25 +0000

I don’t think we’re experiencing a bond bubble. interest rates are where hey should be in comparison to NGDP growth and an output gap.

#4 and #2 are both correct.

your last sentence is absurd; real inflation inflation reduces the real household debt burden, and the only way the economy grows anymore is by increasing the household debt burden — this is in line with Larry summers’ recent speech.

when GDP growth outstrips wages for 35 years, bubbles are really the only way the economy can grow.

By: roystgnr

roystgnr — Sun, 17 Nov 2013 15:24:42 +0000

You don’t think we’re experiencing a bond bubble?

What’s the defining characteristic of a bubble? Speculators stop expecting to get paid based on what the asset will actually return (whether from dot-com companies making profits, homes being rented to or purchased by non-speculators, etc) and start expecting to make a return by selling to another speculator at a higher price (the “bigger sucker” theory). It doesn’t matter if you overpaid for something as long as you can turn around and resell it to someone who will also overpay, right?

Now, how are holders of government bonds currently expecting to be paid? Are we planning (or even able) to raise taxes and cut spending so much that we can use the excess revenue to pay down our debts? Or are we planning to just issue even more debt later and get the new bond holders to repay the old bond holders?

This doesn’t look like a normal bubble, because there’s no manic search for illusory profit. But perhaps a manic search for illusory safety qualifies…