The price of money. For more than three decades, it was falling. Now it’s going up.
Money is going to stay expensive for a good long while—and not just because it’s taking longer than expected for the Federal Reserve to wrestle down inflation.
For economics wonks, the price of money that balances savings and investment while keeping inflation stable is called the “natural rate of interest,” or r-star.
Bloomberg’s team of economists estimates that, adjusted for inflation, the natural rate of interest for 10-year US government notes fell from 5% in 1980 to a little less than 2% over the past decade.
Cheaper money also meant that even as US federal debt almost tripled, from just over 30% of GDP in 2000 to more than 90% today, the cost of servicing that debt remained low, allowing the government to continue spending without restraint.
In nominal terms, that means 10-year Treasury yields could settle somewhere between 4.5% and 5%.
And the risks are skewed toward even higher borrowing costs than that baseline suggests.
Bloomberg 19 October 2023
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