BS. They're not anything like the past. Ten year rates are now sitting right on top of inflation rates for an extended period of time. Right when the fed attempts to micromanage the economy. What a coincidence.
more time now... The idea of "equiibrium, real interest rate", i have heard it referred to as the "natural interest rate", is a theoretical concept. It is impossible to calculate accurately, and has to be approached empirically. The thinking behind it is that if real interest rates are above the ROR on capital stock (buildings, durable goods, etc.) people won't borrow to invest and the economy will stagnate and contract. (Why would you invest if you don't earn a positive return?) On the other hand, if real interest rates are below the ROR on capital stock, then people will borrow to invest, the economy will expand, prices will rise, etc. and eventually inflation will result. Consequently, the Fed monitors business conditions closely, the general economy, and inflation, trying to get a handle on ROR on capital stock and to estimate, guess would be more like it, whether rates are too low, too high, or just right (just like Goldilocks' porridge). One thing I would think the Yellen Fed monitors closely are the number, kind, and amounts of financial institution loans being made. Since the Fed is the bank regulator, those are numbers that can be had with great accuracy. Under the current economy it's obviously a difficult assignment to determine whether rates should be raised or lowered or left unchanged. Another question is what is the current natural rate, i.e., the rate at which there will be neither inflation nor contraction, and what should it be once the economy is robust again, or perhaps better said, as robust as it is going to get in a maturing economy such as the U.S. economy. Its usually the ten year real rate that is used as the benchmark, I think. I would imagine the question of the natural rate is a prime topic for Fed discussion. We are likely not too far below the optimum rate right now as things stand, and so I don't expect rates to go up very much for a long long time. I am one of those who believes that ROR in the twenty-first century will average 2.5 to 3.5 % below the 2Oth Century, U.S. ROR. For nominal stock market return in first half of the 21st century I would use 4.5-5.5% instead of the 8% figure commonly used in the latter half of the 20th Century. That's how I see it now. Technological developments, of course, might, with time, change this picture. As Yogi said, "It's tough to make predictions, especially about the future."
The economy would have gone into depression with many bankruptcies and foreclosures happening all at once. It would have been cathartic....and by now, we would probably be starting to recover....and the future would be looking bright. Instead, we've been on a slow-no growth path....and now the slow, agonizing downhill fall.
Indeed, had many more banks been allowed to fail than the couple hundred or so that did because they couldn't come up with enough collateral, had General Motors and Chrysler been allowed to fail, had AIG been allowed to go under, had we allowed a few million more bankruptcies and foreclosures, had we let our many State pension funds and 401Ks lose 30-50% of their equity value for the next decade, had we postponed repair of the country's infrastructure and allowed the country to slip deeply into a marvelous 'cathartic' deflation, pushing up real interest rates on government debt a percent or two, it would have been very cathartic. I recall how cathartic the 1930s were, do you? Those years were very cathartic to say the least. And the best part is that our relative economic growth rate would have been much higher now because we'd be starting from below zero. Wouldn't that have been wonderful !! +20
The Scary Number Hiding Behind Today’s GDP Party. To judge by gross domestic income, the U.S. economy appears much shakier. The federal government today released two very different estimates of the U.S. economy’s growth rate in the second quarter. The one that got all the attention was the robust 3.7 percent annual rate of increase in gross domestic product. Not many people noticed that gross domestic income increased at an annual rate of just 0.6 percent. That’s a big discrepancy for two numbers that should theoretically be the same, since they’re two ways of measuring the same thing: the size of the economy. If you believe the GDP number, you’re happy. If you believe the GDI number, you’re thinking the U.S. is skating close to a recession.