The main point of contention is whether the recent rise in inflation will be temporary or more protracted.
You know I am on Team Transitory. My view that the Fed is doing a great job and should be commended is the true contrarian take of 2021.
That aside, I am dubious that moderately higher inflation will actually have any effect on interest rates. Not even a couple years of 6% inflation, which is very unlikely.
The old model where inflation and nominal interest rates moved closely in tandem was based on a world where the marginal and median dollar saved was from middle class families. That world is dead, replaced by our current world of extreme inequality and elite domination. And while a middle class family may decide to spend more if inflation is high and return on their bank account balances is low, the wealthy just don’t work that way.
Rates are low and will continue on a secular path even lower, real and nominal both, because demographic and technological change has resulted in a permanent “creditworthy borrower’s” market. We are getting rarer, and savers are getting more common.
You have savings to lend, but want stability, low risk, and liquidity? Take a number bub, nobody cares in 2021.
The idea that savers can say “Due to higher inflation, I won’t lend out my money unless I get a commensurable higher rate” just doesn’t fly. The marginal and median dollar saved is saved by someone with a high net worth who does not have a bunch of consumption he will substitute for savings if he doesn’t get his desired rate.
Negative real rates are our future, and negative nominal rates will be a regular thing too in a large and growing portion of the world.
