January 2021 – 3 in 3
This month, Jason Weaver discusses nominal vs. real rates, inflation and the modern monetary theory (MMT).
Nominal vs. Real Rates
Nominal rates are the stated rate of a bond. It is the monetary price that a bond pays. For example, a bond paying 5% = 5% nominal rate.
Real Rates are the interest rate that takes inflation into account. This gives investors a more accurate measure of buying power. For example, a bond paying 5% with 2% inflation = 3% in the real rate or “yield”.
Typically, when the inflation rates are positive, nominal rates exceed real rights. But the opposite is true when inflation rates are negative.
Inflation is the measure of the rate of rising prices of goods and services in an economy.
Causes of inflation are:
High demand for products or services (Consumers willing to pay more)
Rise in production cost such as raw materials & wages
Inflation expectations have risen based on the belief that vaccines, increased government spending, continued Fed support will lead to a strong economic rebound this year. This can be seen in the “10 Year Breakeven Inflation Rate”, the difference between 10 year nominal & real rates (previous chart)
Modern Monetary Theory (MMT)
The modern monetary theory (MMT) proposes that governments who control their own currency can spend freely, as they can always create more money to pay off debts in their own currency. If the spending generates a government deficit, this isn’t a problem either. The government’s deficit is by definition the private sector’s surplus. MMT proponents argue governments can control inflation by spending less or withdrawing money from the economy through taxes. Traditional economists have issues with MMT, but it continues to be a hot political topic.
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January 2021 – 3 in 3 Weaver Consulting Group is a local, family owned, Registered Investment Advisory practice in Huntington Beach, California. We have been providing our expertise and sharing our experiences for the last 22 years. It is our priority to act in the best interest of each person that we work with. Therefore, the experience you have with our firm is individually tailored. We strive to include all aspects of your personal and financial goals when consulting.