Interest Rates and Nominal GDP Growth Rates since 1995
Between 1985 and 1995--the years in which my neural network was trained to respond to reality--the gap between the interest rate on 10-year Treasuries and the nominal GDP growth rate averaged 3%/year. In order to maintain a constant debt-to-GDP ratio with a debt-to-GDP ratio of 50% of a year's required a primary surplus of 1.5% of GDP. In order to maintain a constant debt-to-GDP ratio with a debt-to-GDP ratio of 100% of a year's GDP required a primary surplus of 3% of GDP. Running up the national debt was thus quite costly.
Since 1995, the rate of growth of U.S. nominal GDP has averaged almost exactly the nominal interest rate on 10-year Treasuries: people are so willing to pay the U.S. government to hold their money that there is no required increase in the primary surplus to finance additional national debt and maintain a constant debt-to-GDP ratio.
For how long will this state of the world continue? What will follow it? And how should I retrain my neural network in order to deal with this brave new world we have now been in for… eighteen years?
