[Phaedrus]

As can plainly be seen in the lower (inflation-adjusted) chart, interest rates vary substantially over time, even after subtracting out the rate of inflation.

I see real interest rates gravitating around and tending toward a few percentage points above zero over time, the "real rate of return". The graph thus supports my argument. When inflation was a problem in the late 70's and early 80's, interest rates were in the high teens. Why was that if inflation is irrelevant? You are not winning this debate, sourcery. Why should I keep asking you questions that you ignore?

[sourcery]

Why was that if inflation is irrelevant?

I never said inflation is irrelevant. If that's what this is all about, please understand that I consider inflation to be a very significant subcomponent of interest rates.

However, inflation cannot be a factor or determinant of real interest rates, now can it? And yet the real interest rate is not a constant. Why does it change?

[Starwind]

I've been following the thread with some interest, and while I would not presume to speak for sourcery in any way, I do not understand Phaedrus' last response.

Phaedrus: post #78: I see real interest rates gravitating around and tending toward a few percentage points above zero over time, the "real rate of return". The graph thus supports my argument.

Phaedrus' arguments were:

Phaedrus post #49:
Interest rates track exceedingly well to actual inflation alone. Expectations have a minor, short-term effect, offset by reality in the medium term (months).

Phaedrus post #63:
Interest rates track to inflation nearly perfectly and exchange rates track to relative inflation nearly perfectly, statements to the contrary notwithstanding.

Phaedrus post #66:
Interest rates are generally considered to have 2 components: the "risk-free" rate, the proxy for which is typically the 1-year T-Bill, and an "inflation premium". Add the 2 and you've got today's rate.

Phaedrus post #67:
Our discussion revolves around interest rates to those who pay their debts timely, however.

The lower graph in Sourcery's post #72, is the Real Interest rate adjusted for the inflation rate - i.e. real interest rate excludes inflation, thus removing the 1st of your 2 components.

As you agree the conversation centers around individuals who pay their debts timely and the graph covers T-Bonds & T-Bills, there should be no variation in the risk premium, thus removing the 2nd of your 2 components.

Yet after removing both components, clearly, the real interest rate graph shows a variation of:

1.5% - 4.5% for the long bond, and;
-2% to 1.5% for the T-Bill

over the last 2 years - 24 "months", the "medium term" you asserted over which "expectations have a minor short-term effect".

Variations of 3 to 3.5%. After effects of inflation and risk have been factored out.

I presume a 20-year corporate banker would not consider 3-3.5% real, risk-free interest over two years to be an insignificant. No? After negotiating terms, would you be willing to reduce the rate to creditworthy borrowers further by those points? I suspect not. I suspect you view 3-3.5% real risk free interest very significant.

So I fail to see how the graph supports your assertions that:

Interest rates track exceedingly well [or nearly perfectly] to actual inflation alone.

The 2 components, the "risk-free" rate and an "inflation premium" sum to the current rate.