Opinion
Falling Interest Rates and Government Investment
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Financial markets are global, so it would be very strange if this decline in real interest rates were just a local U.S. phenomenon.
By Kim Schoenholtz and Stephen Cecchetti
Switzerland is an amazing place, not least the skiing, the chocolate, and the punctual trains. The latter is part of the country's exquisitely maintained infrastructure: there are no potholes, and no deferred maintenance of train tracks, tunnels, airports, or public buildings. Few countries go so far, but many can take a lesson: it pays to maintain infrastructure at least so that it doesn't fail.
We bring this up now because financial markets are telling us that it's a very good time to build and repair infrastructure: real (inflation-adjusted) interest rates have fallen so low that it has become exceptionally cheap to finance the improvement and repair of neglected roads, bridges, transport hubs, and public utilities. Yet, in the United States, we are doing less public investment than ever: net government investment has fallen to what is probably a record low.
To see what's happening to the trend of public funding costs, we try to remove cyclical fluctuations (which also removes the impact of most monetary policy actions) by looking at forward interest rates. Using the yield curve for both nominal and inflation-indexed Treasury bonds, a group of Federal Reserve economists have computed the "five-year forward five-year interest rate." One way to understand this is as the interest rate that you would see today in a contract to buy a five-year bond in five years.
Read full article as published by The Huffington Post.
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Kim Schoenholtz is Professor of Management Practice in the Department of Economics and Director of the Center for Global Economy and Business.
We bring this up now because financial markets are telling us that it's a very good time to build and repair infrastructure: real (inflation-adjusted) interest rates have fallen so low that it has become exceptionally cheap to finance the improvement and repair of neglected roads, bridges, transport hubs, and public utilities. Yet, in the United States, we are doing less public investment than ever: net government investment has fallen to what is probably a record low.
To see what's happening to the trend of public funding costs, we try to remove cyclical fluctuations (which also removes the impact of most monetary policy actions) by looking at forward interest rates. Using the yield curve for both nominal and inflation-indexed Treasury bonds, a group of Federal Reserve economists have computed the "five-year forward five-year interest rate." One way to understand this is as the interest rate that you would see today in a contract to buy a five-year bond in five years.
Read full article as published by The Huffington Post.
___
Kim Schoenholtz is Professor of Management Practice in the Department of Economics and Director of the Center for Global Economy and Business.