Many commentators have asserted that the era of low interest rates is over

But I don’t see that happening. 

There were fundamental reasons interest rates were so low three years ago. Those fundamentals haven’t changed

The low interest rates that prevailed just before the pandemic were the end point of a three-decade downward trend.



A useful concept here, going back more than a century to the work of the Swedish economist Knut Wicksell, is that of the so-called natural rate of interest. 

Wicksell defined the natural rate either as the interest rate that matched saving with investment or as the rate consistent with overall price stability. 

These definitions are actually consistent with each other: An interest rate that is too low, so that investment spending exceeds the supply of savings, will cause inflationary overheating of the economy.

The fact that we didn’t see inflationary overheating over the course of a 30-year trend of falling interest rates suggests that the decline wasn’t artificial — that the natural rate must have been falling over that period.

Financial markets expect inflation to revert to prepandemic norms

Paul Krugman NYT 4 October 2022

https://www.nytimes.com/2022/10/04/opinion/interest-rates-inflation.html


US Home prices rose more than 40 percent from February 2020 to June 2022

Paul Krugman NYT 30 September 2022

https://englundmacro.blogspot.com/2022/09/us-home-prices-rose-more-than-40.html



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