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Thursday, June 24, 2010

The Limits of the Yield Curve

I'm not an economist, I don't even play one on this blog, but I am able to read. Here's Paul Krugman from December of 2008:

...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.

I've been critical of Krugman at times, but this seems like a reasonable idea. It also makes me wonder if there aren't other times when long run interest rates don't mean what they normally mean.

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.

9 comments:

J. Strupp said...

"It also makes me wonder if there aren't other times when long run interest rates don't mean what they normally mean."


Keep walking towards the light Jeremy.

Jeremy R. Shown said...

Strupp - what if the light's a freight train?

J. Strupp said...

Take your chances.

D said...

These interest rates, in fact, don't mean anything. They don't mean anything because they are based on precisely nothing; they are arbitrarily set by central planners. They convey no objective information about savings, profitability, or intertemporal relationships. In short, they are utterly useless. Wait, scratch that. They are useful for those who see the idiocy of them.
The fact that they are not high (due to NO savings and endless capital consumption brought on by arbitrary government thievery and spending) leads the astute observer to note that the Great Recession has hardly even begun. What sort of madman would think that certain projects and ventures are profitable when they know for a fact that there is no capital to back them up? Fool me twice!
DeLong's observation is very interesting. The claim of the safety of US debt is spurious at best. The interesting part is that they are probably safer, for the time being, relative to other traditional sources, because those sources are collapsing at this very moment. The US is not far behind, but who am I to tell the insane what to expect from a country who's debt obligations number in the tens of trillions?
By all means, invest money on the faith and credit of the US government, which owes more money than cotton exists to print it on.

J. Strupp said...

"By all means, invest money on the faith and credit of the US government, which owes more money than cotton exists to print it on."

And the world is.

.60% on the 2 year.
2.98% on the 10 year.

Reality continuing unabated.

J. Strupp said...

"The claim of the safety of US debt is spurious at best."

Then I trust you and Schiff and the rest of the Mises folks are in the process of liquidating your portfolios in favor of spam and ammunition (you love it Dadster) to warehouse in your newly built bombshelter because that's all that's gonna have anything of value if the U.S. full faith in credit become worthless.

But I'll bet a million "worthless" greenbacks right now you're not, and either is the rest of the world.

And that's the point.

D said...

"But I'll bet a million "worthless" greenbacks right now you're not, and either is the rest of the world."

I keep cash as the only US asset.

The rest of the world is not? Likely they are those with the same mindset as investors in the Pound in 1914.

The most interesting of your comments regards Schiff, whom you clearly know invests in assets outside of the US, none of which are included in your cute swipe at so-called survivalists. Nor are they anything serious investors invest in.

But I do appreciate your concession that the world is in trouble after its fiat dollar standard inevitably collapses. Perhaps then the quacks will finally admit that only real money can avoid collapse and endless devaluation.

And besides, what gives a fiat currency any power? Only the hard power and guns that back it. Much more civilized than the crazies who value things that are actually valuable.

J. Strupp said...

O.K. D, it's apparent that we don't live in the same universe here so let's just wrap it up. This whole thing has taken a turn for the abnormal.

It's my fault. I took the bait having known full well how this thing was going to end up which is some philosophical mumbo jumbo on how nothing is real and we should be trading gold bullion back and forth to one another or something along those lines.

D said...

How could trading item A 'back and forth to one another' be so abhorrent when the current system is trading Item B back and forth with one another?

In our case, A tends to always be A, or even A+1. B always tends to be B-1, B-2, and so on. At the present time, we are trading at B-95.

You will recall that dollars gained roughly 13% in value up until 1913. Today, the dollar has lost 95% of its value.

The situation we are in is very real, and it is having very real effects on people. You'll notice that we get no pleasure out of saying, for time immemorial after the fact, 'I told you so.'

And by the by, I'm not a 'gold bug.' I advocate the use of money, in whichever form it takes on due to its marketability in the hands of human actors.