Re: poly: Why interest rates may stay low

Hal writes:
> M | D
> | DD
> O | DD
> | DDDD SSS
> N | DDD SSSSSSSSS
> | SSSSSSSSSSSSSSSS**SSSSSSSSSSSSSSSSSS
> E | SSSS DDDDD
> | DDDDDDDDDDDDD
> Y | DDDDDDDDDDDDDDDDDDDD
> |
> |-----------------------------------------------------
> 1% 2% 3% 4% 5%
>
> I N T E R E S T R A T E S

All right, except you used tabs, whose screen interpretation varies,
and you have the axis labels reversed: the flat part of S should have a Y
intercept of 1.5-3.5%. (Economists are stuck with this odd axis convention.)

>I don't see why these various facts imply that the supply curve is
>flat. A flat supply curve means that you won't get many more people
>willing to invest at 3.5% than at 1.5%. How does this relate to the
>fact that historical returns have been in this range?

I think the axis mis-labeling is the source of your confusion here.
A flat S meanse you can get as many people as you want at about the same price.

>So, what ends up happening to the demand curve? Does it stay the same?
>If so, what did it matter what the shape of the supply curve was?

The demand curve gets "burned" off, so it's flat up to the price point.

>I've enhanced my show factory with robots and it can produce three
>times more shoes than before. ...
>But society as a whole benefits because shoes are really cheap.

My analysis had no explicit connection between growth and return on
investment. Perhaps growth can get faster while return stays constant.
I don't know.

Robin Hanson
hanson@econ.berkeley.edu http://hanson.berkeley.edu/
RWJF Health Policy Scholar, Sch. of Public Health 510-643-1884
140 Warren Hall, UC Berkeley, CA 94720-7360 FAX: 510-643-8614
Received on Fri Feb 27 23:06:04 1998