July 11, 2016

DEAR, NOT CHEAP:

Cheap Money Talks (Paul Krugman, JULY 11, 2016, NY Times)

[T]here has been an extraordinary plunge in long-term interest rates. Late last year the yield on 10-year U.S. government bonds was around 2.3 percent, already historically low; on Friday it was just 1.36 percent. German bonds, the safe asset of the eurozone, are yielding minus -- that's right, minus -- 0.19 percent. Basically, investors are willing to offer governments money for nothing, or less than nothing. What does it mean?

Some commentators blame the Federal Reserve and the European Central Bank, accusing them of engineering "artificially low" interest rates that encourage speculation and distort the economy. These are, by the way, largely the same people who used to predict that budget deficits would cause interest rates to soar. In any case, however, it's important to understand that they're not making sense.

For what does "artificially low" mean in this context? Compared to what? Historically, the consequence of excessively easy money -- the way you know that money is too easy -- has been out-of-control inflation. That's not happening in America, where inflation is still below the Fed's target, and it's definitely not happening in Europe, where the central bank has been trying to raise inflation, without success.

If anything, developments in the real economies of the advanced world are telling us that interest rates aren't low enough...

Since the dollar you get back when you loan money will buy more than the one you leant, why would you also receive interest?


Posted by at July 11, 2016 12:04 PM

  

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