Implications of the present yield curve

[bigbadwolf]

A piece by Mike Whitney today:

Treasury yields are "blinking red", but the Fed keeps acting like nothing's wrong. What's the deal?

Let's explain: Fed chairman Ben Bernanke's bond purchasing program (QE2) has sent the yield on the 30-year Treasury skyrocketing. At the same time, the the 2-year Treasury is stuck at a lowly 0.61. That means, the "yield curve" between the two bonds has grown steeper, which normally happens at the beginning of a recovery because investors are moving out of "risk free" bonds to riskier assets like stocks. Typically, the yield on the long-term bond will start to go down on its own because investors expect the Fed to raise short-term rates to curb potential inflation. But that's not happening this time. Why? And why should we care?

The reason we should care is because the yield curve is signaling one of two things; inflation or default. What it is not signaling is a robust recovery.

There are some quotes from recent WSJ articles as well, which indicate the economic strategy of American policymakers. Not very encouraging.

 

[koupparis]

No it's not very encouraging if everything plays out as described. I'm curious to know what the alternatives are? All Bernanke is trying to do is stimulate the economy and restore confidence. Keeping rates low is a good decision in my opinion.

QE2 I'll leave up for debate. What's the alternative? Why is it a bad idea?

 

[bigbadwolf]

No it's not very encouraging if everything plays out as described. I'm curious to know what the alternatives are? All Bernanke is trying to do is stimulate the economy and restore confidence. Keeping rates low is a good decision in my opinion.

QE2 I'll leave up for debate. What's the alternative? Why is it a bad idea?

1) Bernanke's idea of "stimulating" the economy doesn't look like it's going to work (if you read the WSJ pieces Whitney cites).

2) The lower dollar is going to lead to lower living standards in the US -- assuming the rest of the world stands still for this "beggar thy neighbor" trade policy (reminiscent of the 1930s, when everyone was trying to devalue relative to everyone else).

3) That there is a dearth of plausible alternatives itself speaks volumes about the failed neoliberal economic policy of the last three decades -- deregulation, financialisation, evisceration of manufacturing, deepening economic divides -- and the corner US policymakers have thus painted themselves into, where the credibility of the dollar is now in question and the usual financial and economic instruments simply don't work. This is a systemic and deepening crisis.

 

[koupparis]

Sure people will have opinions on whether it will work or not. But was it a bad idea from the onset, or is it a bad idea in hindsight? There's a huge difference there and calling something a bad idea after it fails, when everyone agreed with it from the beginning, means nothing. Good ideas will fail, learn from that and move on.

Assuming we aren't in the nascent stages of a recovery, and assuming the dollar falls (more) relative to other currencies, then yes we're headed into less blissful times. Two things which may or may not materialize.

I agree just dumping money into a hole may not solve the problem. I've only read of a couple alternatives to QE2 and they either have fewer chances of actually being implemented, or they fix one hole by opening another. I'm just looking for constructive criticism and not negative criticism.

 

[daleholborow]

I agree just dumping money into a hole may not solve the problem. I've only read of a couple alternatives to QE2 and they either have fewer chances of actually being implemented, or they fix one hole by opening another. I'm just looking for constructive criticism and not negative criticism.

Dumping money? What money. Oh, the money that is being invented out of thin air, to pay bills the US has no other way of meeting?

Common sense would seem to suggest that spending less than you earn would be a good way to start extracting yourself out of a huge financial crisis. How does that saying go... "when you find yourself in a hole, the first thing to do is stop digging..."

 

[koupparis]

I totally agree. It seems illogical to think that things must get worse before they get better, but in some cases this works out. Think about a business going under - sure they need to cut spending - but maybe temporarily boosting their advertising/R&D/whatever budget gives them the boost they need to go form red to black again.

It's pointless to quote cliches and be cynical when no other viable option is put forward.

 

[daleholborow]

Just read this again, and it seems particularly pertinent given that the USA is currently in emergency talks about raising their debt ceiling. The simple fact is, if you want to stop going broke, you have to spend less money than what you earn, and what you DO spend has to be spent "better".

Sorry, but there are LOTS of viable options being put forward.

The USA (and indeed, Europe, Japan, et al), can keep spending beyond their means, and inevitably go broke, or they can cut their budget deficits by trimming things like military spending, reduce the redundancy and waste in the social welfare systems (which does NOT mean I am against welfare or health care), and investing money in good education.

Instead, the US government is arguing and overturning a few billion dollars worth of budget cuts, in the face of a (is it now 11, or 13?) Trillion dollar debt.

I think a little cynicism is called for, don't you?