...I see that economists at the Cleveland Fed are taking some comfort from the positive slope of the yield curve. Long-term interest rates are higher than short-term rates, which is usually a sign that the economy will expand.
Not this time, I’m afraid. It’s all about the zero lower bound....
... the Fed can’t cut rates from here, because they’re already zero. It can, however, raise rates. So the long-term rate has to be above the short-term rate,...
So sad to say, the yield curve doesn’t offer any comfort. It’s only telling us what we already know: that conventional monetary policy has literally hit bottom.
Specifically, maybe the low long run interest rates on US debt we are experiencing right now are not the result of a positive outlook on the future fiscal picture. Perhaps they are just the result of very high demand for US debt during a flight to safety.
Answering this question, or at least thinking about it, is important since the low rates are used as evidence in the case for additional deficit spending now. Here's Brad DeLong:
Confidence in the safety and soundness of U.S. Treasury bonds is greater than--well, greater than it has ever been in my lifetime.To which I would add, "probably because they are the last best hope of earth," if I was feeling wistful. But what it comes down to is that maybe our debt has such low rates because, right now, everything else just seems a lot riskier.