Friday, January 11, 2013

Bernanke Is Not to Blame for Low Rates #387

Thought I'd hammer away at this again because I hadn't in a while. But it bears repeating because of the enormous policy implications and the political lobbying power of people who don't like low rates. Anyways, with the knowledge that "the" real interest rate will adjust and remain at an equilibrium that balances savings and investment in an economy, we expect the interest rate to fall when saving increases relative to investment. Bear in mind, this is the natural operation of a secular market, with no policy interference; simply a price changing to clear a market. Well check out the graph:

Ben Bernanke needs to throw this graph right in Paul Ryan's face next time he starts complaining about the "financial repression" caused by "artificially" low rates. Serisouly, look at that: in 2010, the American economy funded ALL the private investment firms wanted to make out of domestic savings and had over a trillion dollars left over. Of course, that was more than absorbed by the Federal budget deficit, which is why we still ran a current account deficit. But with inflation expections running so low and the private sector flooding the economy with net savings, low rates are the result of the market system, not an act of policy or choice.

P.S. as luck would have it David Glasner just made a new post with exactly this theme, but of course a lot better. Here's an exerpt and a link:
"First, it can’t be emphasized too strongly that low real interest rates are not caused by Fed “intervention” in the market. The Fed can buy up all the Treasuries it wants to, but doing so could not force down interest rates if those low interest rates were inconsistent with expected rates of return on investment and the marginal rate of time preference of households."

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