Real Interest and the Return to Normalcy

What drives markets in the end are fundamentals, and few variables are as important as the real interest rate—the return, after inflation, on relatively risk-less assets. It determines one part of the return on savings, and it feeds through into the relative price of debt versus equity. For the first half of this decade—after the crash of 2000—real rates have been close to zero (and even at times below zero). As a result there has been a boom in consumer spending, a dash-for-debt,
and a rapid increase in asset prices, notably housing. The growth of private equity and infrastructure funds is also partly explained by this phenomenon of low interest rates.

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