Upside-Down Town

From Greg Mankiw, we see that real interest rates are now negative. Is this a big deal? Mankiw says... probably not:

In standard models of asset pricing, negative real interest rates are most likely to arise if growth expectations are particularly low or if uncertainty is particularly high. Low growth expectations encourage households to save, which drives down equilibrium rates of return. High uncertainty drives up risk premiums, which in turn drives down the return on safe assets, perhaps below zero. Both forces seem to be working now.

In other words, this is a reflection of other bad things in the economy, esp. low confidence, but it isn't actually a horrible thing in and of itself.

However, credit markets are already having trouble staying afloat. With real rates of return now negative, it might be harder to get the credit markets back on their feet.