Interesting stuff from Brad DeLong, possibly explaining much of the last decade of economic weirdness:
“You may say: A 10-year nominal Treasury bond rate no higher than inflation is supposed to be the current value of the natural interest-rate? Good God! That is absurd! Something is wrong with our economy, and wrong at a much deeper level than a simple shortage relative to demand of the supply of safe-and-liquid-store-of-value assets that can be hoarded! It makes no sense that real capital assets must be at such a premium valuation in order to induce wealthholders not to hoard but rather to invest in the future! And if you were to say that, you would be Larry Summers.
“You may say: In the mid-2000s, it was all because wealthholders in China had this extraordinary and not-entirely-rational demand, and today it is because wealthholders in Germany have an analogous extraordinary and not-entirely-rational demand for the safe-and-liquid-store-of-value assets by the US government. And if you were to say that, you would be Ben Bernanke.
“And you may say: Those extraordinary foreign demands for dollar assets as safe-and-liquid-stores-of-value are, today, reflections of insane austerity and secular stagnation in Europe, and were, last decade, reflections of the global imbalances caused by China’s rapid development and potential political instability. And if you were to say that, you would be Paul Krugman.
“And, of course, all three are right.”
And of course, the sequence of different foreigners eager to hold our bonds due to regional political risk or secular stagnation may not find a successor once the Chinese and Europeans feel less frightened. Which means as always that past performance may not imply lengthy future continuation of low rates, or perhaps that when rate increases come, they might come quicker and more sharply than expected…