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Tuesday, January 17, 2006


Edward Hugh

"One was high rates of saving worldwide,...."

You see the savings "glut thesis" won't die a death so easily. Obviously Mervyn has been reading more of Brad Setser than Bernanke had (although I guess he's thinking of more than just China when he says Asia). Mervyn King would definitely be second on my list (after Bernanke) of 'knows what he's doing' central bankers).

"In 2004, China saved 49 per cent of its national income, a sizeable amount of which was in US government bonds."

And why is there so much saving going on in China? Well obviously it isn't driven by high interest rates. The changing demographics might tell us something though. The time is getting near when we will need to take a long hard look at what we thought we had learned from Knut Wicksell.

"Another explanation for low interest rates was that low rates, held down by the world’s central banks,..."

I don't think the use of the word 'explanation' here follows my understanding of what the word means. He seems to be saying rates are low because they are low, and they are low, in part, because Central Bankers keep them that way. This isn't an explanation, since it doesn't explain why central bankers, normally thought to be prudent types, and more likely 'hawkish' than not on rates, have been pushed towards keeping the rates down. That would be the explanation part. As you say, there is a 'rather lively debate' on some possible explanations on your other post.

Claus Vistesen

Could the explanation of low interest rates not be found in the rise of China and India (emerging economies)?

I.e. Their production essentially moving the boundaries of "global potential output" have helped keep consumer inflation down due to cheap labour and unit costs thus permitting western central banks to hold interest rates low. This obviously raises the question of whether central bankers in stead should have looked to the asset markets in order to see the warnings. However it can hardly be disputed that surging energy prices couples with prickling housing bubbles have not materialised substantially in consumer prices ... eh?

The Economist tries to explain it "reviving" the beloved IS/LM
schedule ... http://www.economist.com/displaystory.cfm?story_id=4274896

"Today, however, the model may be more relevant because the entry into the world economy of cheap labour in China and other emerging economies is helping to hold down inflation. In a world of low inflation, IS-LM rides again."



I recall a centuries long historical chart of interest rates exhibiting long term decline, other than the inflationary period of the 70s. If production continues to expand and hold inflation in check, we could see rates fall to next to zero with rising asset prices.

Edward Hugh

"thus permitting western central banks to hold interest rates low."

Well this is definitely one of the legs on which the structure stands, but it is only one of them, since it only explains why the Central Bankers aren't under pressure to raise rates. To find out why they are able not to raise rates (in the sense of where the money comes from to make the rates possible) you do still need some version of global imbalances theory. That would be the other leg.

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