Is the era of cheap money over?

If you want to claim that low interest rates were responsible for those bubbles, however, you need to come to terms with the fact that there were some other impressive bubbles before rates got low.

Tech hype

I suspect — I hope! — that some of my readers are too young to remember just how intense the hype about tech stocks was in the late 1990s. (You kids, get off my lawn!)

Information technology is amazing, but it has done far less than many expected to improve our material quality of life.

More to my current point, while the IT revolution was real, it didn’t justify the prices people were paying for technology stocks.

The tech bubble, with all its crazy valuations and fraud, took place at a time when real interest rates were quite high by historical standards and far higher than they have been recently. In other words, bubbles, even crazy bubbles inflated in part by fraud, can happen even when the Fed hasn’t been keeping interest rates low to support a weak broader economy.

Still, interest rates have gone up a lot in the past few months. Does this mean that the cheap-money era is over? To answer this question, you have to ask why the Fed felt compelled to keep rates so low for so long.

The basic answer is that since 2000 and especially since the global financial crisis, businesses have persistently been unwilling to maintain a level of investment spending that used all the money households wanted to save, unless interest rates were very low. This condition has the unfortunate name “secular stagnation” — unfortunate because it’s widely and wrongly construed as an assertion that it means slow growth, not low interest rates.

Demographic forces

The idea of secular stagnation was first introduced in the 1930s, but the postwar boom made it seem irrelevant. Then Japan began experiencing persistent weakness and very low interest rates in the 1990s, and in the aftermath of the 2008 financial crisis, the whole advanced world found itself in a similar condition.

What causes secular stagnation? The best guess is that it’s largely about demography. When the working-age population is growing slowly or even shrinking, there’s much less need for new office parks, shopping malls, even housing, hence weak demand. And America’s prime-working-age population, which grew rapidly for many decades, began stagnating just about the time interest rates began sliding.

And these demographic forces in the world’s largest economy aren’t going away. If anything, they’re likely to intensify, in part because the rate of immigration has dropped off. So there’s every reason to believe that we’ll fairly soon go back to an era of low interest rates.


In that case, however, why have rates shot up? Well, the Fed is raising rates right now to fight inflation. But this is probably temporary: Once inflation is back down to 2-3 per cent, which will probably happen by the end of next year, the Fed will begin cutting again.

In fact, real long-term interest rates, which reflect expectations of future Fed policy, are up from their pandemic lows, but still only about what they were in 2018-19. That is, the market is in effect betting that the era of cheap money will be coming back.

Does this mean that there will be more bubbles in our future? Yes — but there would be more bubbles even if interest rates stayed high. Hype springs eternal.

This article originally appeared in The New York Times.

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