top of page

An Interesting Essay by San Francisco Fed President, John Williams

Updated: May 18, 2022

Having written about secular stagnation and the natural rate of interest in my August letter, it was interesting to see San Francisco Fed President, John Williams, write about low natural interest rates in his latest Economic Letter. I’m no expert, but it seems to me that Williams is the leading authority on the subject, having written a seminal paper alongside colleague, Thomas Lauback, back in 2001. Therefore, I think he’s worth listening to.

"There is a strong case for a big increase in public investment, particularly in infrastructure"

Indeed, his conclusion is an appeal to central banks and governments to “share responsibilities” [for boosting growth]. He goes on to invoke Machiavelli, suggesting that “we can wait for the next storm and hope for better outcomes or prepare for them now and be ready” (one wonders to what extent his essay swayed opinion at the Jackson Hole Symposium).

To recap, the natural rate of interest is essentially the rate that keeps inflation stable. It has nothing to do with monetary policy and everything to do with structural factors such as demographics, trend productivity and economic growth, emerging markets reserve accumulation as well as general global demand for savings. Williams points to the decline in the natural rate of interest to what are now very low levels over the past quarter century and considers what can be done to increase it. As should be evident, the prevailing natural rate of interest reflects future economic growth prospects, which is why it is so important for investors.

It is a shortage of private investment demand in combination with an oversupply of savings that has caused the natural rate of interest as well as long-term real bond yields to fall as far as they have. In the developed world, it seems to me, private investment is weak either because population growth is low, because economies are already advanced, or because there is no new productivity-busting technology out there (past examples include the plough, the steam engine, the internal combustion engine, and the computer). There isn’t much we can do about the first two, but governments should be doing everything they can to encourage the commercialisation of new productivity-busting technologies (please excuse the pun, but driverless cars should be getting a smoother ride). Furthermore, in the absence of strong private investment, surely there is a strong case for a big increase in public investment, particularly in infrastructure.

In a critique of Williams’ essay, former US Treasury Secretary and proponent of the secular stagnation thesis, Larry Summers, suggests that Williams does not put enough emphasis on infrastructure investment as a means of stimulating growth and thus raising the natural interest rate. Summers is convinced that debt-financed infrastructure investments pay for themselves, essentially as a result of multiplier effects (economist Philip Milton received rapturous applause when he suggested similar on BBC’s pre-Brexit Question Time). Williams does write that, “returns on infrastructure and research and development investment are very high on average,” though it seems Summers wanted him to be much bolder.

As for the savings glut, while developing countries seem intent on accumulating safe haven bonds, this is not the only problem. Take the savings industry in the developed world, for example. In many respects, allowing companies to close defined benefit pension schemes was one of the biggest mistakes ever made by governments. If you are saving for yourself rather than in a pool with others, you are naturally going to over-save. I am guilty of this myself as I believe I have to assume that I and/or my wife are going to live to 110. We are both hopeful that we will be gone by 90, but we have to assume the worst. Scale this behaviour up, and the resulting increased demand for savings is a huge drag on economic growth. As Oscar Wilde said, “Anyone who lives within their means suffers from a lack of imagination.”

To illustrate just how damaging the abandonment of pooling with respect to pension savings has been, imagine if we did the same for another industry where pooling is central: insurance. The idea of insuring yourself is of course absurd.

Let’s hope that in the not too distant future governments can start applying some common sense either with respect to infrastructure investment, putting more incentives in place with respect to new technologies, or discouraging over-saving.

Published in Investment Letter, September 2016

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

Related Posts

See All


bottom of page