4 ms·

My very simple model of this is based on this old blog post[0] by Ben Bernanke. Basically: there is a "natural interest rate" which we can't observe directly, b

My very simple model of this is based on this old blog post[0] by Ben Bernanke. Basically: there is a "natural interest rate" which we can't observe directly, but we can infer it. All the central bank can really do is try to match this. If it sets rates higher, it hurts growth (people will just park their money rather than invest); if lower, it overheats the economy (people will push their money into overly risky endeavours). The natural interest rate is basically a reflection of the country's expected growth (in terms of demographics and resources). In a shrinking, deflationary society (eg Japan), the natural rate is low/negative, and there aren't really monetary (or even fiscal) tools to affect this. It's possible that in the US, the years of explosive growth are gone, population will level off or decline, and so the long-term return on capital will tend to zero. It's also possible that there will be new macro events or technological discoveries that spark new rapid economic growth. But if it's the first case, the Fed can't be blamed for artificially keeping rates low. (I'm not an economist, and am probably wrong on a lot of this.) [0] https://www.brookings.edu/blog/ben-bernanke/2015/03/30/why-are-interest-rates-so-low/ https://www.brookings.edu/blog/ben-bernanke/2015/03/30/why-a...

petercooper 6y ago
It's also possible that there will be new macro events or technological discoveries that spark new rapid economic growth. I am frequently charged with being a naive techno idealist, and will take such a charge here too if it's deserved, but aren't "technological discoveries" and the adaptation of technology what has kept our economy growing for the past few decades anyway? Whether it's the opportunities of increased automation, the Internet, the role of medicine in improving longevity (consider MRIs didn't become mainstream till the 90s), agricultural enhancements, or even the effects of technology on financial markets, the world of economics and economic productivity looks, to me, nothing like that of 1980. As a techno idealist, I would hope that we'll both see this continue and political developments to share the benefits more broadly across society.
- bergie 6y ago
  I guess energy will be the big factor here. If we don’t have cheap enough energy sources / storage to replace oil and coal, the growth will stagnate. But on the other hand, if renewables or fusion or whatever becomes cheap and abundant enough, this alone could power a huge leap in productivity. Just imagine what could be done if energy was essentially “free”.
  - rebuilder 6y ago
    >Just imagine what could be done if energy was essentially “free”. Overheating the planet, for one. https://dothemath.ucsd.edu/2011/07/galactic-scale-energy/ https://dothemath.ucsd.edu/2011/07/galactic-scale-energy/
BenoitEssiambre 6y ago
Exactly and in the private markets, it's normal that expected returns occasionally go negative. In nature, squirrels invest in a cache of nuts for the winter even if they don't expect to get all of it back, otherwise they wouldn't survive. Here is Bernanke again, talking about -4% rates being around equilibrium during the financial crisis: https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-taylor-rule-a-benchmark-for-monetary-policy/ https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-t... The fact that government has this floor at 0% that they won't go bellow means they are stuck at relatively high 0% rates when market rates for marginal return on capital go bellow zero. Having government paper returns above private markets' creates a huge gridlock in the private markets (and forces the government to stay at 0 longer). If they would just go negative to be more inline with the markets, they might achieve liftoff.
- reducesuffering 6y ago
  I think the 0% floor is more of a matter of things starting to become wonky when you hit negative rates. People will just start hoarding cash instead of receive -1% / year of their money. This will cause a bank run of mass withdrawals, banks currently have 0% reserve requirements, so could be insolvent from even minor bank runs...

petercooper 6y ago

It's also possible that there will be new macro events or technological discoveries that spark new rapid economic growth. I am frequently charged with being a naive techno idealist, and will take such a charge here too if it's deserved, but aren't "technological discoveries" and the adaptation of technology what has kept our economy growing for the past few decades anyway? Whether it's the opportunities of increased automation, the Internet, the role of medicine in improving longevity (consider MRIs didn't become mainstream till the 90s), agricultural enhancements, or even the effects of technology on financial markets, the world of economics and economic productivity looks, to me, nothing like that of 1980. As a techno idealist, I would hope that we'll both see this continue and political developments to share the benefits more broadly across society.

bergie 6y ago
I guess energy will be the big factor here. If we don’t have cheap enough energy sources / storage to replace oil and coal, the growth will stagnate. But on the other hand, if renewables or fusion or whatever becomes cheap and abundant enough, this alone could power a huge leap in productivity. Just imagine what could be done if energy was essentially “free”.
- rebuilder 6y ago
  >Just imagine what could be done if energy was essentially “free”. Overheating the planet, for one. https://dothemath.ucsd.edu/2011/07/galactic-scale-energy/ https://dothemath.ucsd.edu/2011/07/galactic-scale-energy/

BenoitEssiambre 6y ago

Exactly and in the private markets, it's normal that expected returns occasionally go negative. In nature, squirrels invest in a cache of nuts for the winter even if they don't expect to get all of it back, otherwise they wouldn't survive. Here is Bernanke again, talking about -4% rates being around equilibrium during the financial crisis: https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-taylor-rule-a-benchmark-for-monetary-policy/ https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-t... The fact that government has this floor at 0% that they won't go bellow means they are stuck at relatively high 0% rates when market rates for marginal return on capital go bellow zero. Having government paper returns above private markets' creates a huge gridlock in the private markets (and forces the government to stay at 0 longer). If they would just go negative to be more inline with the markets, they might achieve liftoff.

reducesuffering 6y ago
I think the 0% floor is more of a matter of things starting to become wonky when you hit negative rates. People will just start hoarding cash instead of receive -1% / year of their money. This will cause a bank run of mass withdrawals, banks currently have 0% reserve requirements, so could be insolvent from even minor bank runs...