Wednesday, August 27, 2014

Interest rates trapped, "It" is winning


The above chart shows 10-year treasury bond yields for the US, Japan, and Germany through the end of 2013 (the last values FRED has for Germany). The downward trend continued through 2014 and this morning, the German 10-year bond yield dropped under 1%.

What seems clear is that massive government debts lead to falling and flatlining interest rates. QE doesn't help because it suppresses rates through central bank purchases. Ending QE doesn't help because then the underlying macro weakness manifests a pent up deflationary wave. Current policies of round robin central bank QE are not working to ignite inflation and only add to the massive debt burdens. As Illusion of Prosperity has been saying for a long time, it is only getting harder to make money from money. Dr. Lacy Hunt from Hoisington Management cited numerous academic studies showing the impact of high levels of debt on growth. The most reliable and unbiased sources I can find don't see sustained rising rates or growth in the foreseeable future.

It is possible that some new policy might break this cycle. A true central bank helicopter money drop should theoretically create a broad increase in consumption in real goods and services and not just financial products. A fiscal money drop similar to what George W. Bush tried in 2008 should have the same kind of effect but with the additional negative effect of increased debt for funding. There are political and legal issues with either of these policies that may prevent them from even being tried.

So far, Bernanke's famous paper describing how he would prevent "it" from happening here has not worked. At best, "it" has been temporarily delayed, but "it" is still out there and "it" is winning.

4 comments:

  1. The answer is obvious. More QE. (See Abenomics, Japan)

    ReplyDelete
    Replies
    1. Anonymous,

      More QE has been the Fed's response 4 times in a row. Yup, just like Japan.

      Delete
  2. Top?
    http://research.stlouisfed.org/fred2/graph/?g=J0O
    Bottom?
    http://research.stlouisfed.org/fred2/graph/?g=J0P

    Bernanke's tour marked the top of the two year increase in short-term rates. Yellen's marked a reduction in QE. I wonder if rates don't start moving significantly upward until the Fed begins to sell assets.

    ReplyDelete
    Replies
    1. Luke the Debtor,

      I don't know if the economy can stand higher interest rates without crashing. I think the Fed plans to keep all assets it has purchased so far to maturity unless there is a big spike in inflation.

      Delete