What Really Drives Long-Term Interest Rates? — Brett Palatiello and Philip Pilkington

Yves here. It’s gratifying to see Philip Pilkington, who wrote some fine pieces for this humble blog before landing at a major investment firm, back to writing articles for the general public. Here, with co-author Brett Palatiello, Pilkington takes on the old canard of the loanable funds theory and demonstrates that it’s irrelevant to setting of long-term interest rates. For those not familiar with it, the “loanable funds” theory stipulates that there is a pool of savings from which loans and investments are made. Long-term interest rates supposedly represent the clearing price for the demand v. the supply for funds. The loanable funds theory plays a major role in mainstream macroeconomic models....

Naked Capitalism
What Really Drives Long-Term Interest Rates?
Brett Palatiello, Head of Systematic Macro & Equities, Ridgewood Analytica, and Philip Pilkington