taper talk

Rentiers, Entitlement, and Monetary Policy by Krugman

What is the role of interest in this world? Interest, classically (and I do mean classically, as in Mr. Keynes and the), is the reward for waiting: there’s supposedly a social function to interest because it rewards people for saving rather than spending. But right now we’re awash in excess savings with nowhere to go, and the marginal social value of a dollar of savings is negative. So real interest rates should be negative too, if they’re supposed to reflect social payoffs.

This really isn’t at all exotic — but obviously it’s a point wealth-owners don’t want to hear. Hence the constant agitation for monetary tightening.

And this agitation does real harm. Think about the Fed’s taper talk: ultimately, I think it’s clear that it was an attempt to throw a bone to the tight-money crowd, in a way the Fed hoped wouldn’t do real harm. But it did do harm: long-term rates popped up, and are a significant factor in slowing our economy.