Two diametrically opposed scenarios exist for what will happen to global real interest rates over the next generation.
Those who predict generally low interest rates over the next generation point to rapid growth of productivity and potential output in the world economy. According to this view, the principal problem faced by central banks will not be restraining demand as it shoots above potential, but boosting demand as it lags behind potential. They point to the fact that the world's major central banks -- the US Federal Reserve, the European Central Bank, and the Bank of Japan -- have so firmly established their anti-inflation credibility that the inflation risk premium has been wrung out of interest rates.
Believers in low interest rates also emphasize shifts in income distribution in the US away from labor and toward capital, which have greatly boosted firms' resources to finance investment internally and reduced their dependence on capital markets. They point to rapid technological progress, which has boosted output from new and old capital investments. With competition strong across the economy, they say that we can look forward to a generation of relatively high asset prices and relatively low real interest rates worldwide.
By contrast, those who predict generally high real interest rates over the next generation point to low savings rates in the US, high spending driven
by demographic burdens in Europe, and feckless governments running chronic deficits and unsustainable fiscal policies. Imagine a bunch of irresponsible Bush-like administrations making fiscal policy, forever.
They also cite investment opportunities in emerging markets, and make the obvious point that if China and India stay on track, their economies' relative weight in the world will double in the next decade or so, as rapid real growth is accompanied by appreciation in their real exchange rates. Sooner or later, the Chinese and Indian central banks' desire to hold down exchange rates to boost exports and their rich citizens' desire to keep their money in accounts at Bank of America will be offset by the sheer magnitude of investment opportunities. In this scenario, bond prices in post-industrial countries are heading for a serious fall -- as are real estate prices in California, New York, and London.
What, then, is an economist to do? One could emulate
J.P. Morgan, whose standard response to questions about stock prices, bond prices and interest rates was to say simply, "The market will fluctuate."
Another alternative is to recall the late Rudi Dornbusch, who taught that any economist who forecasts interest rates based on fundamentals is a fool, because fundamentals are complex and unstable, shifting suddenly and substantially. Even if an economist correctly understands fundamentals, Dornbusch warned, that doesn't mean that markets do. In forecasting interest rates one is engaged not in examining fundamentals, but in predicting what average market opinion expects average market opinion about fundamentals to be.
But Rudi never followed his own advice. So let me place my bet -- which I think is only 60 percent likely -- and say that my best guess is that world real interest rates will be high over the next generation, and that current bond prices (and real estate prices) are not sustainable. Four features of modern politics in the world's post-industrial core lead me to this conclusion:
First, in the US, there is the collapse of "grownup" Republicans in Congress -- the extraordinary failure of fiscal conservatives to mount any effective opposition to the Bush administration's renewed destabilization of American government finances. The deficit orgy of the Reagan era is looking less like a freak political accident and more like a structural feature of Republican Party governance -- what the modern Republican governing coalition tends to do whenever it gains power.
The second feature is the the parallel collapse of a grownup Republican presence in the executive branch. As Ron Suskind reports in his recent biography of Bush's first treasury secretary, Paul O'Neill, former Bush budget director Mitch Daniels once whispered to himself at the end of a disastrous meeting, "Not a typical Republican package. Definitely not." But Daniels decided he would rather run for office in Indiana than take a stand in support of sound fiscal finance.
The third feature is the failure of Western European governments to even begin to think about how to address the coming fiscal crisis of the social-insurance state as a result of their aging populations.
The fourth feature is the inability of Western European governments to enact sufficiently bold liberalizing reforms to create the possibility of full employment, together with the failure of Western European monetary policy to be sufficiently stimulative
to create the reality of full employment.
The arguments for low interest rates seem to me to require a degree of government competence that is unlikely, given political parties' current positions and the existing structure of the institutions that make fiscal policy.
I hope to be surprised. I hope to see governments in Western Europe and the US face up to their responsibilities and conduct sensible, sustainable fiscal policies.
But that is my hope, not my forecast.
J. Bradford DeLong is professor of economics at the University of California at Berkeley and was assistant US treasury secretary during the Clinton presidency.
Copyright: Project Syndicate
Because much of what former US president Donald Trump says is unhinged and histrionic, it is tempting to dismiss all of it as bunk. Yet the potential future president has a populist knack for sounding alarums that resonate with the zeitgeist — for example, with growing anxiety about World War III and nuclear Armageddon. “We’re a failing nation,” Trump ranted during his US presidential debate against US Vice President Kamala Harris in one particularly meandering answer (the one that also recycled urban myths about immigrants eating cats). “And what, what’s going on here, you’re going to end up in World War
Earlier this month in Newsweek, President William Lai (賴清德) challenged the People’s Republic of China (PRC) to retake the territories lost to Russia in the 19th century rather than invade Taiwan. He stated: “If it is for the sake of territorial integrity, why doesn’t [the PRC] take back the lands occupied by Russia that were signed over in the treaty of Aigun?” This was a brilliant political move to finally state openly what many Chinese in both China and Taiwan have long been thinking about the lost territories in the Russian far east: The Russian far east should be “theirs.” Granted, Lai issued
On Tuesday, President William Lai (賴清德) met with a delegation from the Hoover Institution, a think tank based at Stanford University in California, to discuss strengthening US-Taiwan relations and enhancing peace and stability in the region. The delegation was led by James Ellis Jr, co-chair of the institution’s Taiwan in the Indo-Pacific Region project and former commander of the US Strategic Command. It also included former Australian minister for foreign affairs Marise Payne, influential US academics and other former policymakers. Think tank diplomacy is an important component of Taiwan’s efforts to maintain high-level dialogue with other nations with which it does
On Sept. 2, Elbridge Colby, former deputy assistant secretary of defense for strategy and force development, wrote an article for the Wall Street Journal called “The US and Taiwan Must Change Course” that defends his position that the US and Taiwan are not doing enough to deter the People’s Republic of China (PRC) from taking Taiwan. Colby is correct, of course: the US and Taiwan need to do a lot more or the PRC will invade Taiwan like Russia did against Ukraine. The US and Taiwan have failed to prepare properly to deter war. The blame must fall on politicians and policymakers