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Saturday, October 17, 2015

Post-Financial Economy

Can a country have so much capital that it can build all the factories and infrastructure that it wants, and still have extra capital? In such a situation, demand would be served, and still there would be un-invested dollars sloshing around and interest rates would stay low.

In twenty-teens economy, the scarcity is of demand. If there were demand, then capital would chase it.

Right now, the real interest rate is 0.14% on ten year debt -- the ten year T-bill is at 2.04% and the core rate of inflation is 1.9% and 2.04-1.90 = 0.14%. This means a bond paying an inflation adjusted $1 per year, would be worth $714, which is crazy. Historically, should be closer to $20 or $25.

What about all the poor people would love to have a new iPhone, a bigger TV, a new X-Box, and a vacation in Maui? Isn't there unlimited demand?

There does not seem to be. The people with money are sated, and the people without money are without money. Transfer mechanisms between the Haves and the Have-Nots are too small to create demand.


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