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Long term real rates predicted, and r*. From the market, and from the CBO. BOth are predicting real rates will rise (although the market indicators seem to have been way off in the past few years). Figure 1: 10 year real Treasury yield from CBO Long Term Budget Outlook (green), and 5 year 5 year […]

The current economic debate with regards to the secular trend of ever lower, even negative, safe real interest rates is dominated by Keynesian, neoclassical and Austrian explanations. The former (two) argue that the interdependence phenomena of a global savings glut and a secular stagnation cause an oversupply of savings and thus drive down rates. From this position, central bank merely react to market forces. The latter dissent and argue that it was rather the other way around and an asymmetric central bank policy aimed at propping up equity prices led to the secular stagnation now quoted for its justification. In contrast, from the perspective of a critique of ideology, safe real rates where neither driven down by market forces nor central banks but by the weight of being not reasonably safe but riskless. Specifically, I argue that by equating the riskless return with the short-term interest rate, Black and Scholes (1973) state a tautology and imply that both rates shall be zero. In the subsequent inquiry, I show that this argument allows for a neat narration of the economic history of the neoliberal age. Furthermore, I explain why under current conditions ultra low interest rates fail to translate into inflation.

Ten year Treasurys and Fed funds: Figure 1: Ten year Treasury constant yield adjusted by ten year expected inflation from Survey of Professional Forecasters median (red square), from Cleveland Fed (green), and TIPS 10 year constant maturity yield, all in %. NBER defined peak-to-trough recession dates shaded gray. Source: Federal Reserve, Treasury via FRED, […]

With implications for growth and demographic influences. From Rogoff, Rossi, and Schmelzing (AER, 2024): Source: Rogoff, Rossi and Schmelzing (AER, 2024). Contra assertions of a tight and positive link between population growth and the real interest rate, they write: …aggregate population growth rates and real interest rates have structurally trended in opposite directions, except for […]