Extending Greenspan’s Remarks On The Equilibrium Real Rate

A fat cat is not in good shape. And feeding it more, will not give it energy to be more athletic.

Greenspan said… “in assessing real rates [of interest], the central issue is their relationship to an equilibrium interest rate, specifically the real rate level that, if maintained, would keep the economy at its production potential over time. Rates persisting above that level, history tells us, tend to be associated with slack, disinflation, and economic stagnation–below that level with eventual resource bottlenecks and rising inflation, which ultimately engenders economic contraction.”

This statement does not go far enough. I will extend it… “below that level leads to resource bottlenecks, sectors of inflation, rising debt, and if the rate stays below for a long time in conjunction with other policies to raise debt, the rate becomes useless against a rising heavy weight of increased debt and socially non-productive investment, especially when labor share is dropping. An even lower rate at that point tries to push debt even higher with disappointing results that look like secular stagnation.”

I see the global economy as flooded with loose monetary policy for too long. Like I wrote elsewhere, the engine of the global economy is flooded by loose monetary policies in the face of large levels of debt, lower effective tax rates on capital and corporations, and falling labor share. (link to previous post)

In the end, one could conclude that our present low rates are still too high because as Greenspan said, “Rates persisting above that level, history tells us, tend to be associated with slack, disinflation, and economic stagnation.” However, persistently loose global policies in general toward the engine of economic growth combined with falling labor share will produce the same effect over much time.