Odd Lots

Why the Price of Money Surged in the Last 6 Years

October 9, 2025

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  • The central theme of the *Odd Lots* episode, "Why the Price of Money Surged in the Last 6 Years," is the debate and analysis surrounding the rise in the neutral rate of interest (R-Star), which is defined as the rate balancing investment demand and savings supply in the economy. 
  • The guests, Jamie Rush and Tom Orlik, argue that the neutral rate is rising due to structural shifts, primarily citing the 'three D's': demographics (aging populations dissaving), debt (increased government borrowing), and deglobalization (ending the savings glut). 
  • The discussion highlights that the concept of R-Star is often used by policymakers to justify current monetary stances, but the authors of *The Price of Money* attempted to empirically pin down its drivers, linking factors like AI investment and geopolitical shifts to higher future borrowing costs. 

Segments

Introduction to R-Star Debate
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(00:01:48)
  • Key Takeaway: Stephen Myron’s speech highlights the current importance of the neutral rate ($R^*$) in explaining high long-term rates.
  • Summary: Hosts Tracy Alloway and Joe Weisenthal introduce the topic of the neutral rate of interest ($R^*$) following a speech by Fed nominee Stephen Myron, framing it as the ‘multi-trillion dollar question’ regarding persistently high long-term rates.
Defining the Neutral Rate
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(00:08:02)
  • Key Takeaway: $R^*$ is defined as the interest rate that balances the economy’s demand for investment and supply of savings.
  • Summary: The hosts ask for a concise definition of $R^*$. The guests define it as the rate that balances investment and saving, leading to on-trend growth and target inflation.
Shift in Global Savings Dynamics
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(00:06:51)
  • Key Takeaway: The global dynamic has reversed from excess savings (lowering $R^$) to less saving and more investment (raising $R^$).
  • Summary: The guests explain that the long period of falling neutral rates (1980s to mid-2010s) due to excess saving has reversed, causing the cost of borrowing to increase.
Model Approaches to R-Star
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(00:17:25)
  • Key Takeaway: The guests’ model focuses on estimating $R^*$ by analyzing its fundamental drivers (supply/demand for savings/investment) rather than inferring it from current inflation/unemployment.
  • Summary: The discussion contrasts the conventional Laubach and Williams model (inferring $R^*$ from observables) with the book’s approach, which uses theory to pin down empirical drivers of saving and investment.
Primary Drivers Pushing R-Star Up
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(00:41:47)
  • Key Takeaway: The primary forces pushing the neutral rate higher are summarized as the ‘Three D’s’: Demographics, Debt, and Deglobalization, with AI/Data Centers and Defense spending as additional factors.
  • Summary: Tom Orlick lists demographics, debt, and deglobalization as the main drivers pushing $R^*$ up. Jamie Rush adds AI investment, and Joe Weisenthal suggests defense spending, leading to the ‘Five D’s’ framework.
Political Risks to Fed Credibility
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(00:29:18)
  • Key Takeaway: Risks to Fed independence, exemplified by Stephen Myron’s dual roles, could force markets to demand a higher premium to hold U.S. debt.
  • Summary: The segment discusses how political interference and challenges to Fed independence, alongside structural economic shifts, contribute to upward pressure on long-term borrowing costs.
Impact of Higher Rates on Assets
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(00:35:39)
  • Key Takeaway: The effect of a rising $R^*$ on asset prices depends on the cause; AI investment could raise equity values while simultaneously increasing borrowing costs.
  • Summary: The hosts explore the implications of a higher cost of money on asset prices, noting the unusual potential for high investment (like AI) to boost equities while driving up rates.