Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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New topic 699 2020-09-15 17:51:02 TITLE Federal Reserve :
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Federal Reserve: Natural Interest Rate

The 'natural interest rate' is the term for the ratio of the total indebtedness of a nation, divided by its total equity. Shorthand is the total dividends divided by total interest payments paid out by the Federal Reserve . Inflation is indicated by positive values, deflation by negative ones. From this data, one can derive the probable effect of shifting the ratio of supply to demand. If the numbers are large enough, and the differences great enough, the conclusions will likely be correct.

In 2020, Oscar Jorda, Sanjay Singh and Alan Taylor of California studied fifteen wars or pandemics, which had caused more than 100,000 deaths since the 14th century, a grand total in the millions. They found distinctly opposite effects, lasting three decades, between these two sources of mass deaths. The wars caused a steady decrease in natural interest rates, the epidemics caused a steady increase. When the two occurred at the same time, the curve showed a net increase for a decade, followed by a decrease for a decade, followed by two or three decades of steady increase before it reached baseline again. The round trip lasted a surprisingly long time.

The authors speculate that both catastrophes caused a decrease in the supply of labor, but the wars additionally destroyed investment property, which decreased new investment potential and increased the incentive to save. There is no firm evidence to support such conjectures for such an important issue.

The issuance of more bonds or common stocks, as indicated, is a quick solution.

Assuming these data are correct, and assuming politicians want to change this long experience, they may now seem to possess the tool to do so. A law could be imagined, setting upper and lower bounds to inflations and recessions, so they can have their choice. Much is yet to be learned about this tool, including the unintended consequences of using it. The Japanese, for example, once gave away million-dollar Christmas presents to adjust their ratios. The issuance of more bonds or common stocks is a quick solution. The industrialists would surely howl at this limitation of their rights. But they now howl about inflations and recessions, anyway.


Originally published: Tuesday, May 26, 2020; most-recently modified: Thursday, May 28, 2020


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