… in a negative real interest rate environment.
There’s an issue that Paul Krugman raises in “Strange Arguments for Higher Rates” that merits a response. Krugman asks rhetorically:
Are we to believe that an interest rate change that matters not at all to firms making real investments somehow has huge effects on speculators?
To which I can only respond: Yes! The speculators are often financial intermediaries and other financial players who exist on spreads. The whole point of raising interest rates is to restrict the access of the financial system to free financing and thereby reduce the quantity of punts taken on risk assets. Furthermore, because a 1% increase is likely to affect the spread much more dramatically than the real economy’s debt payments, of course, speculators respond more dramatically than non-financial firms.