No One Really Understands Real Interest Rates: Tyler Cowen
U.S. real rates have largely been falling for the last century.
Since the presidency of Bill Clinton, the U.S. has run staggeringly large budget deficits, and racked up trillions in government debt, including most recently from the pandemic. Yet real interest rates have continued to fall, often reaching into negative territory, especially for short-term rates. Naïve theory predicted that they should rise.
Most observers were not anticipating that expected short rates could fall and stay below -4%. Why hold those assets at all? I don’t have a good answer to that question.
Tyler Cowen Bloomberg 31 March 2022
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