Why the Price of Money Surged in the Last Six Years

Episode Summary

Executive Summary: The episode examines the neutral rate of interest (R-star) through a Bloomberg Economics book and debate over whether borrowing costs are structurally rising. Guests argue the post-2010 era of excess saving has reversed toward more government borrowing, deglobalization, defense spending, aging, and AI-driven capital needs, implying higher long-term rates and more constrained policy.

Main Topics: What R-star is and why it matters (Priority: 5/5): The hosts and guests define the neutral rate as the interest rate that balances saving and investment, shaping inflation and growth. They stress that it is useful even if unobservable and debated. Why rates may be structurally higher now (Priority: 5/5): Tom Orlik and Jamie Rush argue the global savings-investment balance has flipped since the mid-2010s, lifting the cost of borrowing across the economy. How their model differs from standard estimates (Priority: 4/5): They contrast their approach with Laubach-Williams: instead of inferring R-star only from inflation and unemployment, they model underlying drivers like demographics, debt, productivity, and globalization. Drivers of rising R-star: the 'Five Ds' (Priority: 5/5): The guests identify debt, demographics, deglobalization, data centers/AI, and defense spending as major upward pressures on neutral rates and long-term Treasury yields. Fed independence, politics, and inflation credibility (Priority: 4/5): The discussion links rising political pressure on the Fed, including Stephen Miran’s role, to higher term premiums and weaker inflation credibility. Market and policy implications (Priority: 4/5): They discuss asset prices, supply shocks, de-dollarization, and the possibility that central banks now face a different regime where supply constraints and capital scarcity keep rates elevated.

Key Arguments: R-star is best understood as the economy’s balancing price of money: when saving and investment are in equilibrium, inflation is near target and growth is on trend. The post-financial-crisis and post-COVID world has seen less global saving and more investment demand, pushing neutral rates higher. The standard Laubach-Williams framework is useful for short-run inference, but it says little about why R-star moves or where it may go. Demographics matter because baby boomers once boosted saving; now aging populations are drawing down savings and increasing public spending needs. Government debt and persistent deficits are among the strongest forces lifting neutral rates because public borrowing competes for capital. Deglobalization raises R-star both by forcing more domestic investment and by ending the era of falling investment-good prices. AI may push rates higher by increasing capital expenditure needs (chips, fabs, data centers) even if it also boosts productivity and equity valuations. A more fragmented global order and less reliance on the dollar could reduce Treasury demand, raising U.S. borrowing costs. Threats to Fed independence and credibility could add an inflation premium to long-term rates. Supply shocks from climate change, war, and supply-chain fragility may force central banks to operate in a higher-rate environment than in the demand-shock era.

Data Points: Podcast recording date: September 24, 2025 - Joe notes the discussion is being recorded on this date while framing the long-term rates puzzle. COVID-era borrowing cost: Could be paid to borrow in real terms - Guests describe the pandemic period as one where governments effectively borrowed at extremely low or negative real rates. Current Treasury yields: In excess of 4% - Used to illustrate how much more burdensome borrowing is now than during the pandemic. Pre-COVID 10-year Treasury yield: About 1.8% - Joe cites late-2019 U.S. 10-year yields as a comparison point for today. Current 10-year Treasury yield: About 4.12% - Joe cites the contemporary yield level as an example of regime change in borrowing costs. Alternative R-star estimates: Around 3.3% to 3.9% - The hosts mention common estimates that differ sharply from Miran’s zero-rate view. Miran’s R-star view: Zero - Described as his argument in the first speech after joining the Fed board. Fed independence benchmark: 1936 - Tom says having a senior White House economic official simultaneously on the Fed board is unprecedented since 1936.

Pivotal Quotes: "the cost of borrowing is incredibly consequential for ministers of finance, it's incredibly consequential for businesses, for households, for investors" — Tom Orlik: Explaining why the neutral rate matters beyond academic debate. "the main driver really is dissatisfied saving by governments or spending by governments" — Tom Orlik: Identifying the strongest upward force on R-star in their model. "all models are fake, but some are at least useful" — Joe Weisenthal: Summing up why R-star may be unobservable but still practically valuable.

Implications: Listeners should expect a higher-rate world if debt, aging, geopolitics, AI capex, and defense spending persist. For policymakers, the key challenge is distinguishing temporary shocks from a lasting shift in the cost of capital.