Negative Real Interest Rates
The real interest rate solved from the Fisher equation is
If there is a negative real interest rate, it means that the inflation rate is greater than the nominal interest rate. If the Federal funds rate is 2% and the inflation rate is 10%, then the borrower would gain 7.27% of every dollar borrowed per year.
Negative real interest rates are an important factor in government fiscal policy. Since 2010, the U.S. Treasury has been obtaining negative real interest rates on government debt, meaning the inflation rate is greater than the interest rate paid on the debt. Such low rates, outpaced by the inflation rate, occur when the market believes that there are no alternatives with sufficiently low risk, or when popular institutional investments such as insurance companies, pensions, or bond, money market, and balanced mutual funds are required or choose to invest sufficiently large sums in Treasury securities to hedge against risk. Lawrence Summers, Matthew Yglesias and other economists state that at such low rates, government debt borrowing saves taxpayer money, and improves creditworthiness. In the late 1940s through the early 1970s, the US and UK both reduced their debt burden by about 30% to 40% of GDP per decade by taking advantage of negative real interest rates, but there is no guarantee that government debt rates will continue to stay so low. Between 1946 and 1974, the US debt-to-GDP ratio fell from 121% to 32% even though there were surpluses in only eight of those years which were much smaller than the deficits.
Read more about this topic: Real Interest Rate
Famous quotes containing the words negative, real, interest and/or rates:
“Mothers often are too easily intimidated by their children’s negative reactions...When the child cries or is unhappy, the mother reads this as meaning that she is a failure. This is why it is so important for a mother to know...that the process of growing up involves by definition things that her child is not going to like. Her job is not to create a bed of roses, but to help him learn how to pick his way through the thorns.”
—Elaine Heffner (20th century)
“The real security of Christianity is to be found in its benevolent morality, in its exquisite adaptation to the human heart, in the facility with which its scheme accommodates itself to the capacity of every human intellect, in the consolation which it bears to the house of mourning, in the light with which it brightens the great mystery of the grave.”
—Thomas Babington Macaulay (1800–1859)
“If a man walk in the woods for love of them half of each day, he is in danger of being regarded as a loafer; but if he spends his whole day as a speculator, shearing off those woods and making earth bald before her time, he is esteemed an industrious and enterprising citizen. As if the town had no interest in its forests but to cut them down!”
—Henry David Thoreau (1817–1862)
“Families suffered badly under industrialization, but they survived, and the lives of men, women, and children improved. Children, once marginal and exploited figures, have moved to a position of greater protection and respect,... The historic decline in the overall death rates for children is an astonishing social fact, notwithstanding the disgraceful infant mortality figures for the poor and minorities. Like the decline in death from childbirth for women, this is a stunning achievement.”
—Joseph Featherstone (20th century)