Tuesday, June 03, 2003

Any reader of the US business press can't help but be clobbered over the head with stories about the ultra-low interest rates today, with the obligatory "back in my father's day, he could buy a car $1.50 and a pack of Marlboros at 0.01% interest rates" stories of yesteryear. Well, the General, as per his nature, is a skeptical fellow, so I decided to crunch some numbers and calculate real interest rates over the past 45 years. The results were interesting and informative.

I decided to define real interest rates as the rate on the 10-year US Treasury bill minus the core consumer price index (all items minus the volatile food and energy sectors) on a monthly basis. Here's what I found:

  • In April 2003 the real interest rate stood at 2.46% -- pretty low by any standards. However, this is up from 1.67% in September 2002.
  • Real interest rates have been rising since September 2002 due to falling inflation (1.5% annualized in April 2003) and stable nominal interest rates (fluctuating between 3.87% and 4.05% since Sept.)
  • From June 1966 and October 1971 -- 65 months! -- real interest rates remained under 2.5%
  • Real interest rates remained under 3% for virtually all of 1993

What lessons can we draw from this simple exercise? Real US interest rates are indeed low, but not unprecedently so, even in post-Volcker Shift America. Real interest rates have been on the rise over the past eight months. Deflation will raise real interest rates, and with core inflation at its lowest point since 1965, deflation is a real threat.

Is finance capital really taking it on the chin these days? Don't be so sure.

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