Why We Need An Inflation Target
Paul Krugman
Look at the lower left-hand corner: the real interest rate on 5-year inflation-protected securities is now negative. In other words, prospects for other investments are so poor that some investors prefer a safe asset that doesn’t quite keep up with inflation.
Yet to maintain employment, we need to sustain spending, one way or another. One way is to have the government take advantage of its low financing costs to spend on useful things; but the deficit peacocks in Congress are blocking that solution. Another is to get real interest rates low enough to get the private sector spending; but that, as we can see, means that the real interest rate on medium-term government debt has to be negative.
The only way you can do that is by having the Fed credibly promise to deliver significant inflation.
Oh, and the invisible bond vigilantes continue their invisible attack: nominal 10-year bonds at 2.71%.
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