As I write this—in June—interest rates in Germany,
Switzerland, Denmark, the U.K. and the U.S. are at historic lows. For me, the
most shocking data point: British gilts—more or less equivalent to U.S.
Treasuries—are at a 300-year low.
There are, of course, nominal interest rates and “real”
interest rates—that is, rates net of inflation. The latter are, to understate
it, hard to get at, but U.S. Treasury inflation-protected securities (TIPS) at
least give us some idea. Five-year TIPS are currently yielding a negative
1.03%. In May, they got as low as -1.24%.
Obviously, a lot of things have affected interest rates,
capital flight from troubled European economies and Federal Reserve policy
being the two most obvious.
In manipulating U.S. monetary policy, the Federal Reserve
has a dual mandate—to foster maximum employment and price stability. Last
September, when it announced “Operation Twist,” the Fed said it intended to
“put downward pressure on longer-term interest rates and help make broader
financial conditions more accommodative.”
Maybe it wasn’t because of Fed policy, but something is
working: At the beginning of 2011, five-year TIPS were at a positive 0.2%. So,
in the last year and a half, rates have dropped by around 120 basis points. I’m
frankly unsure how to characterize that in relative terms—how do you compare a
0.2% rate to a -1% rate? They are both ridiculously low, but one is a lot more
ridiculous than the other.
The Keynesianism-on-crack theory of apparently nearly all
policymakers is that the correct way forward for this economy is to get people
spending rather than saving and that the way to accomplish this is to produce
an environment of negative real interest rates. That is, an environment in
which savers lose money and, therefore, have a very real incentive to spend and
I note that much of this “interest rates at the ‘zero lower
bound’”—that is, where nominal interest rates are at zero—is regarded by
experts as mysterious and problematic. To look at the literature, it is almost
as if, in this situation, different laws apply, in the way that the laws of
quantum physics differ from those of Newtonian physics.
I have a much less nuanced view of all this. I see it as an
explicit policy of the Fed—in the name of “fostering maximum employment,” as
mentioned earlier—to punish savers and, in effect, to turn them into spenders.
This, for our business, is sort of problematic—because we
are in the savings business.