Check out this chart, which was linked to by one of Scott Sumner’s commenters.
It shows a large secular increase in the spread between risky corporate bonds and 10-year Treasuries.
To me, this chart provides evidence of the bogosity of the secular stagnation story. That story claims that “the” real interest rate has been declining in recent decades, so that we face a constant threat of too-low “aggregate demand.” But focusing on 10-year Treasuries to tell that story is a swindle. Looking at risky corporate bonds, we see signs of dis-stagnation.
There is no unique real interest rate. It’s not just that risk premia diverge. Prices of various goods and services are rising and falling at different rates. In health care and education, where prices have been rising, real interest rates indeed have been negative (a “stagnation” story). For many types of durable goods, where quality-adjusted prices have been falling, real interest rates are decidedly positive (dis-stagnation).
Talking of “the” real interest rate reflects GDP-factory thinking. I look forward to a day when PSST thinking has replaced GDP-factory thinking. Then economists will stop fooling themselves with notions like secular stagnation.
Question: With PSST, what would you recommend to Saudia Arabia right now?
1) This is economy completely dependent on specialization and trade in which the slowdown is the price of the specialized good
2) Is it a waste to have the government to spend and invest on other goods?
3) If unemployment goes up what should they do here? Send non-citizens home, allow unemployment to stay higher or Keynesian economics. (Additional concerns that many will turn to terrorism.)
4) Does puritanical religion make it easier or harder to whether this slowdown?
Two points:
1. If you estimate the term premium for the ten year treasury, much of the much vaunted decline in real rates disappears.
2. The average “Moody’s Seasoned Aaa Corporate Bond Yield©” – Consumer Price Index Less Food Inflation Rate during the 1930’s was 5.27%. This was during one of the worst economic periods in US history, but real corporate bond rates were high on average, highest during the recession itself. Meanwhile during the post war expansion decades: in the 1950’s Aaa – CPILF was 1.10%, the 1960’s it was 2.65% (2.55% if I use CPI Less Food AND Energy, 2.73% if I use PCE chain-type less food and energy) These decades are not normally thought of as periods of stagnation and yet…since 2000 the average has been over 3%. Clearly the level of real interest rates doesn’t tell you much about whether the economy is “stagnating” or not.
Never reason from a price change indeed.
Could as well be fewer but riskier public companies or simply heightened risk due to low demand. Lower opportunities may mean lower return but not necessarily mean lower risk. Higher returns may just be higher risk.