Cleveland Fed says what everyone already knows, real interest rates are negative

The "real" interest rate is a fancy word meaning what is the interest rate after adjusting for inflation expectations.  Nominal GDP growth of 5% with inflation rate of 1% will have "real" GDP growth of 4%.  A nominal interest rate of 5% with inflation of 1% would be a real interest rate of 4%. 

Right now the Cleveland Fed shows that the real interest rate is negative.  In other words, the 0% interest rates less 1.5% inflation puts us into negative territory.

Negative real interest rates, in spite of what the Fed says, is bad.  It creates malinvestment.  It's not like the rates need to be lower to have more investment.  How many businessmen do you think say, "You know I would invest in a new plant, if only the interest rate were a bit lower".  No instead they say, "I'm not investing because I'm not sure if my clients are going to be healthy enough to make more purchases."

It causes businesses to take out money for its own sake and invest it where ever they think they can make a profit.  It is fueling the commodities and emerging market booms.  It blows bubbles whenever its tried. 


Source Cleveland Fed

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