From Project Syndicate:
Losing Interest
Two of the world’s most prominent economic institutions, the International Monetary Fund and Former US Treasury Secretary Larry Summers, recently warned that the global economy may be facing an extended period of low interest rates. Why is that a bad thing, and what can be done about it?HT: The Big Picture
Adjusted for inflation, interest rates have been falling for three decades, and their current low level encourages investors, searching for yield, to take on additional risk. Low rates also leave central banks little room for loosening monetary policy in a slowdown, because nominal interest cannot fall below zero. And they are symptomatic of an economy that is out of sorts.
Identifying the problem, much less prescribing solutions, requires diagnosing underlying causes. And here, unfortunately, economists do not agree. Some point to an increase in global saving, attributable mainly to high-saving emerging markets. Readers will detect here echoes of the “savings glut” argument popularized nearly a decade ago by the likes of former US Federal Reserve Board Chairmen Alan Greenspan and Ben Bernanke.
There is only one problem: the data show little evidence of a savings glut. Since 1980, global savings have fluctuated between 22% and 24% of world GDP, with little tendency to trend up or down....MORE
Measuring savings as a percentage of GDP may not be the most informative way to look at the number.
Anecdotal evidence that venture funding is as easy to procure as it was in 1999 would lend credence to the idea that there is a lot of money in search of a return.
It is possible that, just as efficiencies of production have reduced the total amount of resources (both labor and capital) required to make physical things, efficiencies of finance have reduced the slippage in investment so each increment can be smaller than, say, thirty years ago.
On the other hand the lack of alternatives does make the idea of professional "pre-revenue" rounds sound slightly less ludicrous.
See also Brad DeLong's "Notes and Finger Exercises on Thomas Piketty’s “Capital in the Twenty-First Century”: The Honest Broker for the Week of April 19, 2014"
