![]() The fact is that we have seen this movie before, and Larry Summers played a leading role in a key episode. From 2002 to 2004, we had negative real interest rates and we know what happened after that: global financial meltdown. Thus from 1974 to 1976, we had a persistent level of negative real rates and it drove serious mis-allocations of capital. An extended period of negative real-interest rates has occurred twice before in history and each time it has ended very badly. What we don’t know is what risks and distortions are building up inside the system as a result of incentives to make short-term profits in a negative real-interest-rate environment. We know that publicly owned companies are investing much less than privately owned companies. We know that companies are staying in business far longer than they ever should have been, because they can roll over debt and not fail when they should have. We know that there is a massive explosion of mergers and acquisitions as a result of the free money. ![]() We know that it has aggravated income inequality by pumping up the stock market and benefitting those who own assets. We know that the negative real interest rate has accelerated the “corporate cocaine” of share buybacks (some $3.4 trillion in the last ten years).
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