Lukasz Rachel and Thomas D. Smith write,
Our analysis suggests the desired savings schedule has shifted out materially due to demographic forces (90bps of the fall in real rates), higher inequality within countries (45bps) and a preference shift towards higher saving by emerging market governments following the Asian crisis (25bps). If this had been the whole story, we would have expected to see a steady rise in actual saving rates globally. But global saving and investment ratios have been remarkably stable over the past thirty years suggesting desired investment levels must have also fallen. We pin this decline in desired investment on a fall in the relative price of capital goods (accounting for 50bps of the fall in real rates) and a preference shift away from public investment projects (20bps). Also, we note that the rate of return on capital has not fallen by as much as risk free rates. The rising spread between these two rates has further reduced desired investment and risk free rates down (by 70bps). Together these effects can account for 300bps of the fall in global real rates.
Pointer from Timothy Taylor. Rachel and Smith expect that the forces driving down real interest rates will continue to operate. However, Taylor also cites and e-book on real interest rates in which the authors foresee a shift in the underlying fundamentals.
I believe that the outlook for real interest rates is most important for governments around the world, which have run up high debts. A rise in real interest rates could accelerate sovereign debt crises.
Eventually I do see a recovery in rates but this would only mean greater growth possibilities and greater capacity. I don’t see this near term, and the very long term will continue to be down.
Seems like that last paragraph is slapped on to justify your libertarian priors.
The surest cure for low prices is low prices.
Or libertarians are right.
I know I sound like a broken record. My apologies. Maybe I should do like Scott Sumner did seven years ago and just set up a blog banging on my “labor productivity shift” drum everyday.
But in the meantime, check out the section from the bottom of page 24 (Gordon’s innovation wave analysis) to page 26 with ‘pessimistic arguments; as follows:
1. (Summers): Most employment growth will occur in low productivity sectors. (yes, but with apologies to T.S. Eliot – “The last temptation is the greatest treason: to make the right claim for the wrong reason.”)
2. (Gordon again, also Cowen kind of): The low hanging fruit has already been picked
I think Rachel and Smith are making a kind of ‘perfect storm’ argument of a confluence of a lot of factors coincidentally in a state of constructive interference. And that’s seems to be true to some extent, but the two factors above are larger than they credit.
If most people aren’t getting any more productive, they can’t earn the extra real income needed to buy the new output that would result from lots of investments in new capital.
But on the other hand, all we really need is cheap energy (net of externalities) robotics (until the grey goo takes over), maybe with a,dash of world peace to kick start a new wave of growth.
What if the conditions of higher savings does not significantly turn around the next 20 years? US rates in 2013 & 2014 were increasing due to increased oil investment which has turned around and even though the US housing is getting hot again, the outstanding mortgage balance been around $13.5B since 2011. (it did jump to $13.7 last quarter.) Look at Japan they have had low rates since 1992 and they have not seen pressures.
What if low developed world population growth is the primary reason for low investment needs?