I see a problem with the reasoning, according to which we are consuming ‘too much’ today. Leaving aside the excessive use of the ‘carbon budget’, if it was really worth consuming less today for the sake of tomorrow the (real) equilibrium interest rate, which is meant to balance consumption today against consumption tomorrow, should be (much) higher than it is. Or, to put in other words, the increases in the interest rate by the central bank that are expected by the markets would not be nearly enough to bring down inflation. If you believe this to be the case, you could put your money where your mouth is and make a tidy profit, e.g., by shorting long-term bonds. And then save instead of consuming it.
The evidence that we are consuming too much today, as in more than the economy can sustainably handle, is that inflation is too high. Interest rates have had to go up in order to address this, and they may well go up by considerably more. But the post is about more than individuals making intertemporal decisions given market interest rates, and not only because a lot of the investment that we need is in public goods (or other things underprovided by markets).
Wow, masterfully explained!
Thanks!
I see a problem with the reasoning, according to which we are consuming ‘too much’ today. Leaving aside the excessive use of the ‘carbon budget’, if it was really worth consuming less today for the sake of tomorrow the (real) equilibrium interest rate, which is meant to balance consumption today against consumption tomorrow, should be (much) higher than it is. Or, to put in other words, the increases in the interest rate by the central bank that are expected by the markets would not be nearly enough to bring down inflation. If you believe this to be the case, you could put your money where your mouth is and make a tidy profit, e.g., by shorting long-term bonds. And then save instead of consuming it.
The evidence that we are consuming too much today, as in more than the economy can sustainably handle, is that inflation is too high. Interest rates have had to go up in order to address this, and they may well go up by considerably more. But the post is about more than individuals making intertemporal decisions given market interest rates, and not only because a lot of the investment that we need is in public goods (or other things underprovided by markets).