The $300 Trillion Question

Ligaya Kelly worries her pet boarding facility on the outskirts of Los Angeles won’t survive the winter if loan costs keep rising. Economist Diana Mousina says she’ll have to sell her Sydney investment property if interest rates remain higher. John Stanyer has cut back plans for his holiday park in the north of England after his mortgage repayments almost tripled.

Like millions of borrowers across the world, the aspirations of Kelly, Mousina and Stanyer have collided with the steepest monetary tightening campaign in a generation. They’ve done what they can to weather the storm – Kelly has cut workers, Mousina dines at home these days and Stanyer’s expansion plans are on hold -- but how long they can hold out will depend on factors beyond their control, such as deglobalization, aging and the cost of the energy transition.

It’s arguably the biggest question in economics right now: Are these higher interest rates here to stay? In textbook jargon, it all comes down to R-Star (written as R* in economic models) -- the long-term neutral interest rate that keeps inflation steady at central bank’s preferred pace of around 2%.