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It’s Time to Yield to the Evidence

July 7, 2016, 12:09 PM UTC
Computer screen displays laptop graph  of financial trends.
Computer screen displays laptop graph of financial trends.
Chris Cheadle Getty Images/All Canada Photos

We’ve been anxiously anticipating an increase in U.S. interest rates for years now, but instead of going up, they keep going down. Yesterday, they hit a new bottom. Mohamed El-Erian, chief economic adviser to Allianz, told CNBC we should brace ourselves for a 10-year Treasury rate that falls below 1 percent.

El-Erian blames that on Brexit. “While we control our economic destiny, we no longer control our yield curve,” he said. “Our yield curve has been captured by Europe.”

But former Treasury Secretary Lawrence Summers, writing in the Washington Post, questions whether we do, in fact, control our economic destiny. The Fed has been arguing that growth and rising rates are just around the corner. Summers has been pushing an alternative thesis: “secular stagnation,” a persistent excess of supply and weakness in demand that isn’t correcting itself and can’t be addressed by monetary policy.

It may be time to give Summers’ thesis a second look. Something is seriously amiss in the global economic machinery. Brexit chaos only exacerbated the problem, it didn’t cause it. Take a look at G7 10-year bond yields over the last 30 years if you disagree: nearly $12 trillion in government debt worldwide now yields less than zero, but over $10.4 trillion was already doing so before June 23. It would help if policy makers – and those vying for political leadership – would start seriously exploring what to do about it.