We read random academic papers. We are innately wary of any sentence that starts with “Our model says. ” We prefer literature without quadratic formulas.

Nonetheless we remain as open as possible to learning things from all sorts of places.

On this piece we note the following:

1. We have always rejected the “new normal” viewpoint as espoused by Obama administration member Mr. Summers. Instead, we turn it back on its head – lousy government policy restricts growth more than a number of secular real things noted in this piece – the demographic argument for example. We would also note on that basis that the millennial horde is larger than the “aging baby boomer” horde, yet it is only aging baby boomers writing academic pieces which seem to reflect the state of mind of the writer rather than the math of a new generation?

2. A paper written by a PHD candidate and co-authored by the senior famous guy is much more likely to reflect the original narrative of the older famous guy rather than shed any new light on things.

3. We repeat: the “proper” level of interest rates – nominal or real – SHOULD reflect the actions of millions of different activities of humankind, not the whims and policies of a select group of non-elected officials. The history of this type of analysis has been demonstratively wrong through history and little I see in the world today suggests we are going to be any better at it.

“What is the interest rate that is consistent with stable macroeconomic performance of a modern, developed economy? Few questions can rival this one in its difficulty and importance. Equilib- rium real interest rates are unobservable; they are affected by a wide swathe of macroeconomic forces, both domestic and global; and are not invariant to policy regimes. All those factors make the assessment difficult and the answers uncertain. And yet a good handle on the equilibrium interest rate is fundamental to our ability to correctly assess the state of the economy, predict the future trends, and set policy appropriately.”

Jeffrey Bronchick, CFA
Principal, Portfolio Manager

Source: On Falling Neutral Real Rates Fiscal Policy and the Risk of Secular Stagnation