April 20, 2013

WE CAN KNOW IT'S NOT AS GOOD AS IT GETS...:

What If This Is As Good As It Gets: Financial Stability Edition (Karl Smith, 4/20/13, Forbes)

Real interest have famously been on the decline for thirty years. A rougher historical record suggests that English real interest rates may have been in decline since at least 1600.

The standard explanation here is better governance and lower systemic risk.

Yet, lets imagine a simple model where we have two sources of risk. There is background you cannot avoid. And, there is personal risk that you create by through your own choices.

Policy makers have since Thomas Hobbes been attempting to drive down background risk. They have larger been successful. As a result our lives are getting more and more stable.

...because there are too many people employed.  The defining economic features of the past four or five centuries are that we have far more than we used to and producing it requires far less effort.  While this was initially the case in only certain political jurisdictions, it has become the global norm, which only reinforces the trends. 

And what are the inevitable results of such trends?  Previously unimaginable affluence and lower prices and lower employment (and the massive synergy between the two).

Given such excess wealth and consistently falling prices how could interest rates be higher?  In fact, real interest rates remain unsustainably high.

Posted by at April 20, 2013 7:54 AM
  

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