Minyan Mailbag: Real Interest Rates II
The discussion continues...
I appreciate your prompt reply. I understand your point but have one remaining issue - wouldn't foreigners be demanding higher real rates if your thesis were accurate? If real rates have remained at about the same negative level, then doesn't this imply a static return being demanded? I agree that the Fed is ultimately not in control, but if the new supply of US debt had pushed levels over a tipping point, wouldn't investors, including foreigners, demand higher real yields? The "fun" in all this is identifying the tipping point and with credit spreads remaining tight, real yields not increasing, and the $ rallying where is the evidence that foreign buyers are now balking? I agree that they will eventually.....
Ah, you have hit at the root of the problem and if you follow the thread you will see how insidious it all is.
The lenders really are for the most part central banks who lend with printed money themselves; all they care about is currency levels. They don't really care about inflation per se...to them it is currency level only since central banks don't have to buy things. No matter that all currencies are losing value and the consumer (citizen) is becoming worse off. That is only a central bank's problem to the extent that people become unhappy. Central banks only want to make people "think" they are o.k., they don't care if they really are (if they did, they would stop all this folly, created by bureaucrats in the first place, who only want to keep their jobs).
Only citizens care about stuff like standard of living and cost of goods; central banks only care to the extent that people realize what is happening.
Japan's only reason for demanding higher rates is to keep the yen cheap so their economy can export more. The only way that real interest rates can stay negative is if all real rates around the world are that way. This is why central banks don't want the populace to think about debt.
Of course this can't last. It is only the hubris of our central bankers that think it can (or ignore the fact that it can't) that allows the charade to continue. It all started when we allowed paper to be printed without any attachment to the level of debt.
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