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Can you elaborate a little on this? Investments having a negative return does not mean the market (reference) interest rate is negative. Take the gold standard
by samsonradu 7y ago
Can you elaborate a little on this? Investments having a negative return does not mean the market (reference) interest rate is negative.
Take the gold standard, do you think anyone was able to borrow gold and pay less back? Isn’t that the actual interest rate we are discussing here?
- BenoitEssiambre 7y agoThe gold standard was a disaster that lead to the great depression, but that was government manipulated gold. Gold in a free market would tend to self adjust. Buying gold as an asset when there is a "flight to safety" and then selling it in better times when there are enough other good assets available such as stocks with good dividends would mean buying gold when gold prices are high and selling it when prices are low thus resulting in negative returns. Negative real returns happen in free markets. Blocking them causes huge problems.
- samsonradu 7y agoYou’re right, negative real returns definitely happen - but that’s not the interest rate. Interest rates apply to loans, not assets.
- BenoitEssiambre 7y agoThe real natural rate should be in line with the private markets with regards to safe, liquid short term assets. There is an issue when you hit 0% nominal, called the zero lower bound problem (https://en.wikipedia.org/wiki/Zero_lower_bound https://en.wikipedia.org/wiki/Zero_lower_bound). Mechanically you can solve that by keeping inflation high enough that you don't reach negative nominal rates even when you have negative real rates.