The big question in global macro policy today is : Why are long-term interest rates so low. I had a go at this topic over at Institutional Economics and i thought I’d reprint it here. Very preliminary, needless to say.
A general comment on why so few economists trust the market on bubbles. Itâ€™s obvious that low interest rates are crucial, and that current asset prices make sense if and only if sustained low interest rates are a market-driven response to changes in the real economy.
But in an environment with near-zero savings in the English-speaking countries, and large unfunded state obligations in the rest of the developed world, interest rates should be high, not low.
The proximate cause of low interest rates is the willingness of Asian countries to run large current account surpluses (that is, capital account deficits), but there is no convincing micro story as to why people in poor countries should want to save massive amounts to lend to fund consumption in rich countries.
The leading optimist on all this is Bernanke, but he sees the surpluses as the product of macro policy, governments building up reserves in reaction to the crises of the 1990s. This source of surpluses presumably wonâ€™t be sustained, since the countries concerned are incurring huge unrealised losses on their US dollar holdings. So the â€˜global savings glutâ€™ is a temporary one, and is being squandered by borrower nations in high levels of consumption.