…Anything at all:
Now there may be good reason for that: broader markets, real reduced risk because of better information, and so on. The absence of world war helps too. But it also means that if we were to return to ‘normal’ or the mean then the change in rates would be massive:
The most useful contrast is with 1997 – 2007, of course. We’re talking adjustments of four percent or more.
That is not going to happen. There are good reasons. Most mortgage holders would fail to make their payments. Most banks would then collapse. and government debt costs would increase and may politicians would panic at that whether appropriately or not. I will be blunt. Everything has changed. Those rates are history.
This though has massive implications. If this is the case then monetary policy as a mechanism for controlling inflation and economic activity has died: rates that let it work cannot be recreated. And yet almost the whole of macroeconomic thinking is premised on its use, as is the role of central banks in our economies.
The reality is that everything has changed. And yet there is, so far, almost no reaction. Fiscal policy – spend and tax – is the only tool left to the government now and yet no one is saying so.
Four percentage points, not four percent. Jeebus.
But more than that. We’re currently using, as we have this past decade, monetary policy to avoid the risks of deflation. That QE and all that. Ritchie’s insistence is that because we’re successfully using monetary policy it’s not possible to use monetary policy successfully and therefore fiscal policy is the only option left.
Err, yes, yes…..