Monday, February 27, 2012

Negative Real Interest Rates Doesn't Reflect "Pessimistic Outlook"

David Glasner claims that negative real interest rates in the U.S. reflects a "pessimistic outlook" among investors.

But that's not true, except to the limited extent it reflects flight to dollar assets because of the European debt crisis, because if it had been true we would see stock and commodity prices falling. In reality, stocks and commodities are at or close to the highest levels since 2007.

A theory more consistent with the facts is that it reflects an increase in money supply of about 10% the latest year. A higher money supply can be expected to push down bond yields while also raising stock and commodity prices, and that's exactly what we've seen.



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