In this column in today’s New York TImes, Krugman looks at the phenomenon of very low long-term interest rates:
Specifically, there has been an extraordinary plunge in long-term interest rates. Late last year the yield on 10-year U.S. government bonds was around 2.3 percent, already historically low; on Friday it was just 1.36 percent. http://www.bloomberg.com/quote/GDBR10:IND, the safe asset of the eurozone, are yielding minus — that’s right, minus — 0.19 percent. Basically, investors are willing to offer governments money for nothing, or less than nothing. What does it mean?
He argues this is not necessarily the result of central banks (like the Federal Reserve) creating “artificially low” interest rates that would encourage speculation:
If anything, developments in the real economies of the advanced world are telling us that interest rates aren’t low enough — that is, while low rates may be having their usual effects of boosting the housing sector and, to some extent, the stock market, those effects aren’t big enough to produce a strong recovery. But why?
In fact, he would argue if anything interest rates might not be low enough. Yes, we have seen some recovery in the housing market and in the stock markets, but we are not seeing a strong recovery, but so far there has not been a flight of capital, driven by fear, into safe investments like US bonds, and as a result interest rates for such secure investments has stayed low.
Krugman says what is happening could be described as “the Great Capitulation” where, as both he and Larry Summers have argued, the whole world is turning Japanese, with a continuing situation of weak demand and “a bias towards deflation.” He adds
Until recently, however, investors acted as if they still expected a return to what we used to consider normal conditions. Now they’ve thrown in the towel, in effect conceding that persistent weakness is the new normal. This means low short-term interest rates for a very long time, and low long-term rates right away.
Let me stop for a moment. If and when these are reflected more fully in interest rates at the consumer level, it might well affect consumer behavior. Let me give an example. I have a Veterans Administration backed mortgage. About a year ago I refinanced without having to get an appraisal and being able to skip two months payments for a variable rate mortgage fixed for 5 years at 1.75%. As part of the various efforts to stimulate the economy I also paid next to no closing costs. Now, normally when interest rates are very low, one might be more inclined to lock in a long-term low interest rate. At the time of my refinance, the 30 year fixed rated on VA loans was at least a full percent higher, and people were regularly contacting me to try to lock those in now. Except I was looking at things around the world, and I saw little evidence of inflationary pressure that would push long term interest rates up before the end of this calendar year, which is the current expiration date of some of the special opportunities to refinance. Further, the VA would not back another refinance where I would be paying a higher interest rate per se.
If I am right in my speculation, one which Krugman seems to affirm, I would not be surprised not only to see interest rates not rise, but perhaps even lower further. I know the refinance I did saves me $1,000 monthly over my previous mortgage. I am now receiving offers that match my current rate for a 5 year fixed and then variable loan, and also seeing 30 year rates come down.
It would also be a good time to consider either refinancing auto loans if you can get a lower rate, or if you are considering replacing a car in the relatively near future, do so while interest rates are very low.
Krugman, however, is interested in the macroeconomics of this, which inevitably means the politics of this. He reminds us that in the US, interest rates when adjusted for inflation are currently negative. And so?
Meanwhile, there are huge unmet demands for public investment on both sides of the Atlantic. America’s aging infrastructure is legendary, but not unique: years of austerity have left German roads and railways in worse shape than most people realize. So why not borrow money at these low, low rates and do some much-needed repair and renovation? This would be eminently worth doing even if it wouldn’t also create jobs, but it would do that too.
For those who scold us about deficits, Krugman points out
they have been wrong about everything for at least the past eight years, and it’s time to stop taking them seriously.
This is where we get to the politics of it. Democrats should be arguing for taking on our infrastructure issues. It will not cost much, and while I have not run the numbers I have seen some arguments that the tax revenue that would be generated would mean we would clearly be paying an effectively negative interest rate on the financing of what we do. After all, as we can now look back and see, when those on the other side (Mitt Romney, anyone?) argued that we should not bail out the auto industry, not only did the government investment save millions of jobs, the government (meaning we the people) made a profit on that investment.
So let me end with Krugman’s final words, which I hope will convince the Clinton campaign and Democrats running for the House and Senate to take on this issue:
They say that money talks; well, cheap money is speaking very clearly right now, and it’s telling us to invest in our future.
Yes indeed.