A higher rate of expected inflation would also cause the total nominal rate to be greater than 5 .

But when prices are falling, the real interest rate exceeds the nominal rate.

A ten year Treasury has a nominal interest rate of less than 2 .

And, due to rising consumer prices, the nominal interest rate will continue to rise.

To define an interest rate fully, allowing comparisons with other interest rates, both the interest rate and the compounding frequency must be disclosed.

The second adverse effect of deflation is to raise the real interest rate, that is, the difference between the nominal interest rate and the rate of inflation.

Domestic deflation means that the real interest rate on Japanese bonds is higher than the nominal rate.

Stated differently, now that Greece has achieved a zero primary budget deficit, its debt burden will decline if its nominal growth rate exceeds the average interest that it pays on its government debt.

Although it is difficult to anticipate how high long term interest rates will eventually rise, the large budget deficit and the rising level of the national debt suggest that the real rate will be higher than 2 . A higher rate of expected inflation would also cause the total nominal rate to be greater than 5 .

In the United States, this interest rate is the federal funds rate in the United Kingdom, it is the official bank rate.

In 2012, the growth rate of M2 was about 14 , relatively low by historical standards, but still significantly higher than the nominal GDP growth rate.

The current small difference between the real interest rate on such bonds (2.1 for 30 year bonds) and the nominal interest rate on conventional 30 year Treasury bonds (now 4.6 ) implies that the market expects only about 2.5 inflation over the next three decades.

The degree of financial repression in a country can be estimated by calculating the gap between the average nominal GDP growth rate and the average long term interest rate, with a larger gap indicating more severe repression.

When prices are rising, the real interest rate is less than the nominal rate since the borrower repays with dollars that are worth less.

A key parameter for determining the long run sustainability of public debt is the gap between interest rates and the nominal GDP growth rate.

Interest rates were cut by presidential decree to below the inflation rate.

With inflation for the 2006 calendar year down to 6.0 and unemployment down to 8.9 , the nominal GDP grew by an unprecedented 2.9 .

Since WWII, the US unemployment rate has averaged 8 when the short term nominal T bill rate is 2 or lower.

One reason for a rise in the interest rate would be a shift from low deflation to low inflation.

Past experience implies that the real rate will rise to at least 2 , taking the total nominal interest rate to more than 4 , even if expected inflation remains at just 2 .

At the very least, the combination of higher interest rates in the shadow banking sector and weaker nominal GDP growth undermines borrowers debt repayment capacity.

Bank interest rates on savings are lower than the inflation rate and many multiples lower than the rates promised by the informal sector.

A direct effect of the higher interest rate would be to increase the budget deficit and the rate of growth of government debt.

A similar lockup is done in the United States when the Federal Reserve Board is preparing to adjust an interest rate.

That is because an increase in the inflation rate causes interest rates on new debt to rise by an equal amount.

But, even after disinflation in the mid 1980 s, long term interest rates remained relatively high.

The result in Japan would then be rising real interest rates as the low private saving rate runs head on into large fiscal deficits.

The effective interest rate, effective annual interest rate, annual equivalent rate (AER) or simply effective rate is the interest rate on a loan or financial product restated from the nominal interest rate as an interest rate with annual compound interest payable in arrears.

Japan s ability to sustain high fiscal deficits, low interest rates, and net capital exports has been possible because of its high private saving rate, which has kept national saving positive.

At 6.5 , the one year lending rate is now 0.3 above August s headline inflation rate.

The European Central Bank s policy rate stands at 0.75 , while the eurozone s annual inflation rate is 2.5 .

Only thanks to stubbornly persistent inflation has Italy s nominal GDP managed to remain constant. Overall unemployment has climbed to 12 , while the rate for youth not attending school has soared to 44 .

That expected inflation rate is consistent with the difference in interest rates between ordinary US government bonds and Treasury Inflation Protected Securities.

Since 1975, the nominal annual premium on the 30 year Treasury bill has averaged 2.2 in other words, over its lifespan, the 30 year nominal T bill yields are 2.2 percentage points more than the expected average of future short term nominal T bill rates.

If the interest rate is higher than the growth rate, austerity is required the wider the gap, the more austerity is needed.

And the Bank of England has cut its benchmark rate nine times, by 525 points, to an all time low of 0.5 .

In 1985, the interest rate on ten year Treasury bonds was 10 , even though inflation had declined to less than 4 .

Likewise, the Bank of England keeps its policy rate at only 0.5 , despite an inflation rate that hovers above 2 .

So, if inflation is low and stable, central banks cannot be blamed for low long term rates.

Because the inflation rate is also about 2 , this implies a negative real interest rate, which is confirmed by the interest rate of 0.6 on ten year Treasury Inflation Protected Securities (TIPS), which adjust interest and principal payments for inflation.

In fact, there was a temporary upward spike in real long term interest rates during the financial crisis in countries with indexed bonds.

Higher inflation would cause the interest rate on new debt to rise in a way that prevents the erosion of the real value of the total debt.

And, because people trade bonds for commodities, cash, and stocks, the prices of government debt are the rate of inflation, the nominal interest rate, and the level of the stock market.

So the Fed could, in principle, decide to raise the federal funds rate even before the unemployment rate reaches 6.5 .

But did Greenspan really expect interest rates to remain permanently at 1 a negative real interest rate? Did he not think about what would happen to poor Americans with variable rate mortgages if interest rates rose, as they almost surely would?