AT THE END of 1989, an American in London received a call from a friend back home. The caller had watched the fall of the Berlin Wall and the toppling of Nicolae Ceausescu in Romania with growing dismay. He was at the end of a four-year course in Russian Studies at an elite university with hefty tuition fees. He had learned all the Kremlinology a would-be cold warrior could need—but not that the cold war might suddenly end. “I just took a $60,000 bath,” he said.
This story comes to mind not so much because of fears of a new cold war, this time with China, but because of the bond market’s recent response to such fears. Long-term interest rates have tumbled almost as swiftly as communism fell in Europe. The yield on a ten-year Treasury bond has plunged from 2.5% to 2.1% in the past month. Ten-year Bund yields have turned negative again and have reached a new all-time low.
What happens to long-term interest rates in large part reflects what is expected to happen to short-term rates. The bond market’s Kremlinologists expect the Federal Reserve to cut them soon. Other central banks will seek to keep money easy. One consequence is that the secular decline in real interest rates is unlikely to reverse soon (see chart). The implications are far-reaching: the whole edifice of asset prices is founded on a low-rate regime. But what if...
EVERY YEAR, as Americans polish off their Thanksgiving feasts, a particular genre of advertisement begins to air. The details vary, but the plot does not: one family member surprises another with the Christmas gift of a luxury car, often adorned with a cartoonishly large bow. The recipient never betrays a hint of the dismay one might expect of someone whose partner has spent tens of thousands of dollars without consultation. Such a car can easily cost more than the median annual income of an American household, and most people who see these ads will not be able to afford one. But the envy such spots induce serves an economic purpose, even as it leaves the majority feeling worse about themselves.
Ads and other forms of marketing ostensibly serve a straightforward economic role. Firms selling goods and services need to tell consumers about the availability and desirability of their wares, and spend on advertising to do so. By informing consumers about the relative merits of various products, ads improve the quality of purchasing decisions and, conceivably, leave both firms and shoppers better off than they would be in an ad-free world.
Yet advertising might fall short of this ideal in many ways. It need not be honest or representative of the full range of available products, for example. Some firms target impressionable...