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March 23, 2005
Interest Rates and Economic Growth
There is an interesting op-ed by Jeremy Siegel in today's Wall Street Journal. Entitled "The Next Great Wave of Growth," I specifically enjoyed his closing paragraphs:
Today the developing countries, despite comprising 87% of the world's population, produce less than one-quarter of the world's output measured in dollars. It is likely that by the middle of this century, they will produce over half the world's GDP. Indeed, the growth of these economies will become the dominating factor in the world's capital markets.
Investors should not succumb to the pessimistic forecasts of government agencies and others who bemoan the aging of the U.S. population. Chairman Greenspan is finally showing the markets that our historically low interest rates are unjustified. Those pessimists currently buying bonds to protect themselves against the widely predicted economic downturn will soon be sorry that they bet against growth.
My only comments would be that Greenspan does not control the long-end of the yield curve. Witness that since the Fed started targeting a higher Fed Funds rate in mid-2004, the yield on the 10-Year Treasury Note has not moved up:
In a similar vein, are these interest rates "historically low" and "unjustified"? If inflation remains low (unlike the 70's), then who is to say that interest rates are not just getting back to where they should be? This graph of the yields on Moody's Aaa bonds since 1919 makes a case for that argument:
Posted by Peter Mork at March 23, 2005 9:05 AM
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