1 hour ago
13
The Price of Money: A Guide to the Past, Present, and Future of the Natural Rate of Interest, written by Jamie Rush, Tom Orlik, and Stephanie Flanders and published by Oxford University Press, makes the case that the so-called natural rate of interest, known in econ shorthand as r*, is climbing for reasons that have almost nothing to do with what happens in the Eccles Building or the Situation Room.
The natural rate, explained without the jargon
Think of r* as the Goldilocks interest rate: the real rate at which the economy runs at full employment with stable inflation. Too low, and you get overheating. Too high, and growth stalls. Central banks try to steer toward it, but they don’t set it. The economy does.
According to the book’s empirical model, which covers twelve advanced economies and projects forward to 2050, r* bottomed out at roughly 1.7% in the mid-2010s. The authors forecast it will climb to around 2.8% by the 2030s.
Translated into nominal terms, it implies 10-year Treasury yields settling into a range of 4.5% to 5%.
Boomers giveth, boomers taketh away
Starting in the 1980s, baby boomers entered their peak earning and saving years, flooding the global economy with capital. That wave of savings pushed interest rates steadily downward for decades, creating what economists called the “global savings glut.”
Now the movie is running in reverse. As boomers retire, they’re drawing down those savings rather than adding to them. The pool of available capital is shrinking just as demand for it is growing.
Layer on top of that the explosion in public and private debt across advanced economies, and you get a textbook supply-and-demand squeeze. More borrowers are competing for a shrinking pot of savings. The price of money, naturally, goes up.
The authors argue that neither Federal Reserve rate decisions nor geopolitical disruptions are the primary movers of long-term borrowing costs. Demographics and debt create the trend.
What a higher r* actually means for markets
Governments that loaded up on borrowing when rates were near zero will face materially higher refinancing costs over the next decade. Corporate borrowing gets more expensive too. Companies that thrived in the era of cheap capital, particularly in sectors like tech and real estate that are sensitive to discount rates, will need to justify their valuations under a fundamentally different cost-of-capital regime.
Real estate stands out as especially vulnerable. Higher long-term borrowing costs directly affect mortgage rates, which in turn dampen property demand and compress valuations.
The book’s analysis also carries a message about central bank power. If r* is being driven by demographic aging and debt accumulation, then the Fed can influence where rates sit relative to r*, but it can’t change r* itself. That’s determined by how much the world saves and how much it borrows.
Whether the specific numbers hold up, a 2.8% natural rate and 4.5% to 5% Treasury yields, will depend on how demographics, productivity, and fiscal policy evolve across a dozen economies over the next 25 years.
Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.
English (US) ·