Co-authored with Alan Auerbach, Professor of Economics, University of California, Berkeley
Gene, We agree, as ever!
Nice article. Very low and negative expected borrowing costs (after inflation, after taxes, after bankruptcy and other protections) have led to a substantial wealth bubble in the U.S. and much of the world, with valuations rising to unprecedented levels. And with many threats as positive real borrowing costs start bursting that bubble. Like Larry and Alan, I question how much all of this relates to some saving glut. I also conclude that these negative expected borrowing costs, once built in and expected, lead to a misallocation of investment resources and, as I wrote ages ago, a major reason why stagnation accompanies high inflation. And to rising wealth inequality. Further, I wonder why a decline in the real rate of return to investment must translate in absolute terms (and, hence, disproportionately) to the decline in the real rate of return to a safe investment.