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I have now seen dozens of articles about zero (central bank) interest rates and their consequence. IMHO what matters is the REAL interest rate, which may be too complex for financial newsletters. We have negative real interest rates now, and we had them in the mid '70s (when inflation was high) and probably at other times. Has anyone seen articles about negative real interest rates?
@NumbersGal Not to imply that you have noted searched the term; but I have linked below. Suggestion: Go directly to YouTube and type in the term. There are many well done videos for many monetary/investment topics. YES, you may discover a few clunkers that are poorly done, so look through as many as you choose; as there will be someone who is best at presenting the understanding.
Catch - my question was not clearly formulated. I know what the terms mean. My question, to rephrase it, is: Has anyone seen articles which predict the consequences of negative real interest rates set by the central banks. I have seen a number of articles about the consequences of negative nominal interest rates. Many of these articles suggest that it is new territory - i.e. we have no experience with negative nominal interest rates. But it seems to me that real interest rates are more important than nominal interest rates - and we do have significant experience with negative real interest rates.
Hi @NumbersGal I just happened to look through this thread again and read your recent post. I suggest that Japan is the current model for negative real interest rates for a long time frame. I placed another link below regarding this topic. I posted a few years ago here regarding BOJ actions related to their propping of pension funds and related by creating what I will name, "special equity investment units". BOJ was/did and may still be making purchases in the Japanese equity markets. I don't have time this week to do any type of deeper look again; but I've placed another link below. Side note to central bank actions: The ECB has been purchasing corp. bonds in the EU area for several years and had expressed several times about the possible purchasing of EU zone equity, too. One may presume these would be targeted towards particular interests or troubled companies.
@NumbersGal - Thanks for a provocative question. Of course there’s been studies done re the long term effects of negative real interest rates on an economy & inflation. However, there are so many other variables involved I doubt such studies would shed much light on current conditions. Those variables might include: the prevailing jobless rate, consumer debt levels, consumer savings levels, government spending levels / deficits, dollar value vs other currencies, business inventory levels, commodity inventory levels, current personal and corporate tax rates ... ad infinitum. Even the interest rate / duration out on the yield curve has a bearing. FOMC promulgated short-term rates might be negative, while (more importantly) longer term rates, which consumer pay on home or auto loans, might not be. One relatively new ingredient in all of this, which has received considerable attention from present and past FOMC officials, is the deflationary impact technology may be having on the overall price structure.
Generally, as I suspect you intend to imply, negative real rates if prevailing over long periods should promote higher inflation as businesses and consumers find it profitable to borrow at low rates and invest the “cheap” money in homes, autos, business expansion, inventory stockpiles, etc. But things are never as simple as they might appear.
The biggest question mark in all of this is determining what the current level of inflation really is. And that can vary from consumer to consumer, from statistician to statistician, and from one segment of the economy to another. If you’re elderly, your inflation rate is higher when health care costs rise. If younger, the cost of education or buying a first home are more important to your real inflation rate,
In the interest of thoroughness, I’ve dug up a few links that explain 7 of the most commonly used gages of inflation:
To further complicate things, the federal government in 1983 significantly changed the construct of the Consumer Price Index. The net effect was to understate the rate of inflation compared to the previous formula. The benefit to the government was that it saved money by having to adjust Social Security payments upward to a lesser degree than previously. One of the changes was that if a product underwent significant upgrade (think of RAM increasing in computers) without a price change, the net result was computed as a decrease in cost to consumers - lowering inflation. Here’s a link explaining the 1983 changes: http://www.cornerstonewm.com/downloads/measuring-inflation.pdf -
Added: Since @NumbersGal asked for “articles” on the topic, I’m linking two below:
"To further complicate things, the federal government in 1983 significantly changed the construct of the Consumer Price Index. The net effect was to understate the rate of inflation compared to the previous formula. The benefit to the government was that it saved money by having to adjust Social Security payments upward to a lesser degree than previously."
What I think you're alluding to is this part of the Cornerstone Wealth Management piece:
Starting in 1983, the government significantly changed the way it calculates CPI. It has also made a few major changes since that time that would lead many to wonder if current inflation data is understated. ...
Major budget items such as Social Security benefits and pensions are tied to the CPI index. The three changes are: 1. In 1983, housing prices were removed and “owner’s equivalent rent” was used instead.
There are two problems with this. The first is that one would not expect housing prices to be a significant concern to most on SS. They are likely not in the market for housing. Thus they locked in their costs years ago. Many have paid off their mortgages as well.
The second problem is more subtle. Social Security COLAs are based on CPI-W, not CPI-U. The change in measuring the cost of shelter described above was made to CPI-W in 1985. It is the irrelevant (to SS) CPI-U that was changed in 1983. https://www.ssa.gov/oact/cola/colaseries.html (SSA COLA history)
https://www.bls.gov/opub/hom/pdf/cpihom.pdf (Stuff about CPI; see Exhibit 1) This describes the various changes in the CPI methodology and why they were made. Nothing nefarious.
"Since its inception, the CPI has been comprehensively revised on several occasions. ... For example, in undertaking the 1940 comprehensive revision of the CPI, BLS acted on recommendations made by an Advisory Committee appointed by the American Statistical Association."
Comments
Not to imply that you have noted searched the term; but I have linked below.
Suggestion: Go directly to YouTube and type in the term. There are many well done videos for many monetary/investment topics. YES, you may discover a few clunkers that are poorly done, so look through as many as you choose; as there will be someone who is best at presenting the understanding.
Broad search of the term negative real interest rates.
Take care,
Catch
Regards,
Ted
https://saylordotorg.github.io/text_macroeconomics-theory-through-applications/s20-14-the-fisher-equation-nominal-an.html
Regards,
Ted
https://saylordotorg.github.io/text_macroeconomics-theory-through-applications/s20-14-the-fisher-equation-nominal-an.html
I have seen a number of articles about the consequences of negative nominal interest rates. Many of these articles suggest that it is new territory - i.e. we have no experience with negative nominal interest rates. But it seems to me that real interest rates are more important than nominal interest rates - and we do have significant experience with negative real interest rates.
I just happened to look through this thread again and read your recent post.
I suggest that Japan is the current model for negative real interest rates for a long time frame. I placed another link below regarding this topic. I posted a few years ago here regarding BOJ actions related to their propping of pension funds and related by creating what I will name, "special equity investment units". BOJ was/did and may still be making purchases in the Japanese equity markets. I don't have time this week to do any type of deeper look again; but I've placed another link below.
Side note to central bank actions: The ECB has been purchasing corp. bonds in the EU area for several years and had expressed several times about the possible purchasing of EU zone equity, too. One may presume these would be targeted towards particular interests or troubled companies.
BOJ and negative real interest rates.
BOJ and ETF index purchasing
I hope some of the above will be of benefit.
Pillow time here and now.
Regards,
Catch
Generally, as I suspect you intend to imply, negative real rates if prevailing over long periods should promote higher inflation as businesses and consumers find it profitable to borrow at low rates and invest the “cheap” money in homes, autos, business expansion, inventory stockpiles, etc. But things are never as simple as they might appear.
The biggest question mark in all of this is determining what the current level of inflation really is. And that can vary from consumer to consumer, from statistician to statistician, and from one segment of the economy to another. If you’re elderly, your inflation rate is higher when health care costs rise. If younger, the cost of education or buying a first home are more important to your real inflation rate,
In the interest of thoroughness, I’ve dug up a few links that explain 7 of the most commonly used gages of inflation:
- Consumer Price Index http://www.economywatch.com/inflation/index/consumer-price.html
- Commodity Price Index http://www.economywatch.com/inflation/index/commodity-price.html
- Cost of Living Index http://www.economywatch.com/inflation/index/cost-living.html
- GDP Deflator http://www.economywatch.com/inflation/index/gdp-deflator.html
- Producer Price Index http://www.economywatch.com/inflation/index/producer-price.html
- Wholesale Price Index http://www.economywatch.com/inflation/index/wholesale-price.html
- Capital Goods Price Index http://www.economywatch.com/inflation/index/capital-goods-price.html
To further complicate things, the federal government in 1983 significantly changed the construct of the Consumer Price Index. The net effect was to understate the rate of inflation compared to the previous formula. The benefit to the government was that it saved money by having to adjust Social Security payments upward to a lesser degree than previously. One of the changes was that if a product underwent significant upgrade (think of RAM increasing in computers) without a price change, the net result was computed as a decrease in cost to consumers - lowering inflation. Here’s a link explaining the 1983 changes: http://www.cornerstonewm.com/downloads/measuring-inflation.pdf
-
Added: Since @NumbersGal asked for “articles” on the topic, I’m linking two below:
This one argues that the U.S. is heading for serious inflation: https://www.lombardiletter.com/u-s-inflation-rate-forecast-for-next-5-years-looks-ominous/8193/
This one argues that we’re heading for serious deflation: https://www.thinkadvisor.com/2019/02/16/gary-shilling-5-warning-signs-deflation-is-coming/
What I think you're alluding to is this part of the Cornerstone Wealth Management piece: There are two problems with this. The first is that one would not expect housing prices to be a significant concern to most on SS. They are likely not in the market for housing. Thus they locked in their costs years ago. Many have paid off their mortgages as well.
The second problem is more subtle. Social Security COLAs are based on CPI-W, not CPI-U. The change in measuring the cost of shelter described above was made to CPI-W in 1985. It is the irrelevant (to SS) CPI-U that was changed in 1983.
https://www.ssa.gov/oact/cola/colaseries.html (SSA COLA history)
https://www.bls.gov/opub/hom/pdf/cpihom.pdf (Stuff about CPI; see Exhibit 1)
This describes the various changes in the CPI methodology and why they were made. Nothing nefarious.
"Since its inception, the CPI has been comprehensively revised on several occasions. ... For example, in undertaking the 1940 comprehensive revision of the CPI, BLS acted on recommendations made by an Advisory Committee appointed by the American Statistical Association."