Why are long-term real interest-rates so low and does it matter? Free Essay, Term Paper and Book Report
Do China and other emerging markets hold the key to solving the persistent low long-term interest rates 'conundrum', famously dubbed by Alan Greenspan? The former Fed Chairman was speaking to an apparent paradox: despite seventeen consecutive nominal short-run rate hikes by the Fed since June 2004, U.S. long-term rates have remained unmoved. In fact, U.S. nominal long-term rates have trended well below their historical two-percent premium over short-term treasuries. As a result, even as inflation has edged up, long-term rates have fallen, flattening and even inverting the U.S. yield curve.
Just as the Black Death of the 14th century drove up inflation by decimating a third of Europe's working-age cohort, today's swelling formal workforce in emerging markets acts as an 'inverse plague', expanding the labour pool, moderating wages and dampening long-run inflation expectations.
Surprisingly, this tremendous productive impetus has failed to take centre stage as a likely explanation for the conundrum. Instead, many believe that the low long-term rates are ill-omens for the global econom......
Word Count: 737
Page Count: 2.9 (250 words a page / double spaced)
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