So this is the federal funds rate. Now, I'm mentioning term. Term is the time that you have to leave your money in and cannot get it out at least without a penalty. So this is the shortest term interest rate in the United States. It's called the Federal Funds Rate, and it's an overnight rate. Now, most of the people who deal in this maturity of one day are banks, because individuals normally don't borrow money overnight. It's too short an interval. Only people who are very sharp pencils and very professional will borrow money for one day. But it's a lively market, largely among bankers. So this is the interest rate on federal funds in the United States from 1954 to the present. So the ad that I showed you was from somewhere around here. I picked the high interest rate time looking for an ad. Those were different times. Look where we are now. This is amazing. It's right at zero. And it's been at zero ever since the crisis. Now, it's going to pick up. In fact, it's already picking up. Do you see this little uptick at the end? That was the decision of the government, the US Federal, well, The Federal Reserve under Janet Yellen to raise interest rates, and it got a lot of attention. But I have to say, I'm not very impressed by this raise of interest rates because it's virtually zero still. So something funny is going on here, wouldn't you say? If you looked at this whole, if your job was to predict interest rates and you were standing here in say 2004, would you have predicted this? Well, absolutely no. I shouldn't, say, there might have been someone who predicted this. But as far as I know, no one saw this coming but something very strange is happening. It'd be nice to understand this interest rate market. Now you might first of all say that well this is a targeted interest rate. The Federal Reserve announces a Federal Funds rate target, and they do everything they can and they've decided to put it at virtually zero. So you have to understand the Fed, but maybe you don't have to understand Janet Yellen or Ben Bernanke because these are the chairs of the of the Federal Reserve. Because anyone would do the same thing. It's an economic crisis that's brought equilibrium, short term interest rates down to zero. And to give you an idea that it is an economic crisis and it's not the personality of Janet Yellen that is accounts for this behavior. Let's look at Europe. So this is the European counterpart to the federal funds rate. It's called EONIA, European Overnight Index Average. So it's the same thing. Banks in Europe lend to each other overnight, and this is the interest rate. Now this only goes, I got these data from the European Central Bank and so that's why it only goes back to 1999. But you can see that it has the same downward path since 2000. Now, it's even more interesting because in the US, it stopped at zero. But it somehow knows no zero bound. In fact it's been negative for over a year. And it just seems to be trending down. Is this gonna... What is it... Now, if I asked you to forecast where it will be in 10 years, where will EONIA be in 10 years? Well, you might be inclined to forecast oh, I don't know -3%. Anyone believe that? Anyone offer a forecast? What do you think it will be? It can't go too far negative because the banks have the option of just holding on to cash. Why should we lend money at a negative interest rate? Well, that's an interesting question. You can blame Mario Draghi who's head of the European Central Bank, who he and the others at the bank have lowered the interest rate that they offer to European banks on deposits at the European Central Bank to a negative number. So that you could say it was the decision of the Central Bank. But still it seems odd. Why does a bank ever invest money at a negative rate when they can just pull the money out and hold cash? Cash by definition, I mean real cash, paper money. Those those Euro notes that you have in your pocket, they pay exactly zero interest. So why would a bank lend to another bank at negative? Does anyone have an idea? Why would they? They are doing it right. We know they're doing it. Why are they lending to another bank at a negative rate? It's costly to store cash. First of all, if it becomes known that you have large amounts of cash in your vault, thieves might come and steal it, so you have to buy insurance against that. And then the insurance company will impose costs on you. Plus you have to hire those trucks to drive it. You know, it's not set up... Banks don't hold huge amounts of cash in their vaults. So yeah, so you've got to hire trucks and armed guards and it sounds.. I think also it's just irregular, we don't do this. We don't have you billions in our vault. We have to get a bigger vault maybe because they don't. What's the biggest Euro note? It's probably like a hundred, does anyone know? 500. That's it 500. In the United States, it's only $100. So to store a billion dollars, you need a big vault. So you have to buy a new vault. It's silly things like that that allow negative interest rates. I think that as they learn that it's going to be harder to have a negative. So right now it looks like in this latest data shown here it looks like about -30 basis points where 30, a basis point is one hundredth of a percentage point. So it's minus a third of a percent. So they can get it lower than that for a while anyway. But anyway, it's just trying to understand why did it get so low. So this brings us to causes of interest rates. There was a famous book written by Eugen Bohm von Bawerk in 1884, Capital and Interest, which said, "Interest rates tend to be small positive numbers like 3% or 5% because of technical progress, time preferences and advantages to round aboutness." I think he said round, he wrote in German so how do you say round aboutness in German? It's not exactly an English word either. I'll let you think about that. It's probably a translation of some long German word. But he said, why is it, and where does this number 3% come from? Why is it 3 percent or 5%? Well, he said, "It's because the rate of progress is something like 3%." Also so that sounds plausible, right. The economy is moving forward. So money, one dollar today is really if you take into account what will happen to the economy, it's really like a dollar, $1.03 and in a year. The other thing is time preferences. He said, "People are just naturally impatient. It's built into our, I don't think he said built into our neural structure, but maybe he meant that. So we just want more today. So if a dollar and three cents in a year is equivalent to a dollar today because I wouldn't... I prefer it now. And so I'll take a cut in what I have to get it now rather than later. And finally, advantages to round aboutness. That is advantages to more delayed and complicated production process. So for example, I can talk to... I'll just give you a very homely example. I can talk to a apple orchard and say, "How many apples can you give me today?" And so the guy quotes so many bushels of apples. And then you come back and say, "That's not enough, I want more apples." And he'll say, "Hey, you know our trees only produce so much." But you say, "I want more.". And then he said, "Well, okay, what I'll do instead of giving you apples now, I will sell my apples, buy fertilizer and I get stronger and bigger trees next year and I'll have more for you. But you have, more round about." Right. "I'm converting apples into fertilizer and I'm making the trees bigger. I can get you more next year." That's a roundabout production process. And so there's an advantage to that. So all three of those were causes of interest. Do you think that low interest rates are contributing to inequality? There's definitely some connection because a lot of elderly people retire on fixed incomes. And if they have a rule that they will only consume the interest and the interest is zero, they're in big trouble. And that is unfortunately the situation. It's unfortunate that our efforts at policy can't help everybody. So monetary policy is a very blunt tool. You may feel that you have to cut interest rates to help the economy move ahead, but it doesn't affect everyone the same. And any time it doesn't, that, it has a potential to raise inequality.