My hunch is that low long term real interest is mostly a reflection of what is believed about the future if all things were to remain the same. Most of what we have to look at to make a judgment about where real interest is headed are the spreads between yields on Treasuries and private debt, TIPS and perhaps major commodities to inform us what the markets are saying about future investments here in the US and other developed economies. I believe monetary policy has a large influence on those indicators, not as most people seem to believe by doing something directly in those markets to disturb equilibrium, but indirectly through impressions of the stance of monetary policy, or a general outlook of the outcome of the stance of monetary policy – which incidentally has ranged in degrees of tight for more than a decade (according to actual NGDP relative to the 1990’s trend).

I have seen it said that real interest was declining prior to the 2007 recession, and so doubts are raised about whether monetary policy has any influence at all. What I would point out, though, is that as early as 2005 when it was clear that Bernanke would be Greenspan’s successor, markets roughly understood what he would do before he was able to do it. “They” knew about his preference for explicit inflation targeting. I have found a range of articles and investor blog posts circa 2005 regarding Bernanke’s intentions and “how to get ready (adjust portfolios) for it” in case it “gets bad.” If Bernanke had been what is now labeled a “Market Monetarist” when he ascended to the Chairmanship of the Fed, he might have been better able to foresee the failure of his intended policy instead of taking actions that reinforced and exponentially compounded those beliefs every time he made a statement about the need to “whip inflation.”

As an aside, at one point I went through the CSPAN video library and watched several clips from the 2006-2007 time frame of Bernanke making statements about inflation and the hubris is stunning. The real impact he was having on the economy just from the psychological effects, even at that early date, he cared not. But I digress.

Of course this doesn’t explain much at all about why natural interest is low. And I don’t have any “smoking gun” kind of evidence that can show correlation between changes in monetary policy with natural interest. Someone much more qualified and experienced working with macro will have to come up with that. From my point of view, however, it would be illogical to say something like, “monetary policy has no effect on the quantity and profitability of investments.” If that were true, then the entire debate about inflation targeting vs. NGDPLT, for example, would be completely irrelevant to the current state of economic affairs. And since we are now in the medium run from the plunge in NGDP that began in 2008, and we are scarcely better off, I would say that monetary policy has a very large role to play in the supply/demand equation for capital and the performance of investments over time.

As for conjecture regarding problems with nominal interest rates hitting zero in subsequent recessions, I am not so sure that idea has been fully explored for logical consistency; or perhaps I don’t fully understand the argument. My inclination is toward it being a real possibility if the conduct of monetary policy remains the same. Or in other words, what the 10 and 20-year Treasury bond yields are telling us now is that if the Bernanke Fed lasts forever, the economy is going to suck for at least that long. Without level targeting or corrections for the vulnerabilities in inflation targeting, we are most certain to have another recession that will not be contained in the sector(s) in which it starts; and we are most certain to not have elevated income expectations enough, or interest rates enough to have enough padding to leverage interest rate pegs. I agree that as monetary policy is currently conducted, it is not beyond the realm of possibility to have repeat of 2008 as well.

But if we were to suppose that the Bernanke Fed adopted NGDPLT from the 1990’s trend tomorrow and fully committed to closing the NGDP gap and keep it closed, I think we would have new and different framing for a discussion about interest rates and how much they matter. I don’t believe they matter nearly as much as seems to be the belief in the mainstream macro zeitgeist, and it is rather wrong to assume such importance.