A Washington Post piece on German attitudes towards the crisis in the euro zone at one point refers to the high borrowing costs in Spain and Italy. It then tells readers:
"But in Germany’s view, yields on Spanish bonds — just above 7 percent as of Friday — are indeed with precedent, since Spain borrowed at rates well above 8 percent for most of the 1990s, touching 14 percent at one point. Italy had even higher borrowing costs than Spain in the 1990s."
While the piece later notes that "many economists" say the comparison is misleading because Spain and Italy had higher inflation (much higher) and growth in the 1990s, this is in fact the view of all economists who know arithmetic. Economists focus on the real interest rate, the difference between the nominal interest rate and the inflation rate. Currently inflation in Spain and Italy is running near zero, which means that the nominal interest rates of above 7 percent translate into real interest rates above 7 percent.
By contrast, inflation in both countries averaged more than 5 percent for the first half of the 1990s. This means that a nominal interest rate of 8 percent would have translated into a real interest rate of around 3 percent.
If Germany has people in positions of responsibility who do not understand the concept of the real interest rate it would be very scary. That would be worthy of a major front page story.
(Only one link allowed per comment)