I think you should rewrite your post from around 2015 on growth. "We only have x amount of insurance companies, banks, oil companies etc" We cannot grow our way out of a $40T debt, but cutting govt spending (I know right...) and growing will take pressure off the long end.
Agree, higher (anticipated) AI productivity is the most likely driver.
That also jives with the flow of funds that shows corporates, which over the recent decade had been hoarding cash, have run out of internal funding and are accessing external funds, initially equity (even Google issued stock), and when that has run its course, sold bonds (again, even google).
And just like in undergrad textbooks, that demand crowded out other corp. investment via higher interest rates (the government seems hell-bent on not being crowded out).
US has great productivity. So they had had the best economy engine. But Joe and trump made a law: ria and chips And made many manufactures. These made crowding out effect and misallocation of k,l.
So trump want to use ai to produce the productivity, but I think trump have to stop the chips law and the fiscal active. To recover us' productivity.
Cf) I don't think ai can improve the g. It only show the level effect. Like 1990-2000.
Call it what it is---"A Rake's progress." The long-term Treasury end is giving you a warning. You can heed it, or you can forget it. Tuum est---it's up to you.
1) seizure/freezing of assets held by sanctioned countries at the Fed, Euroclear, etc
2) the coming wealth taxes around the world - who wants to pay a 5 percent levy (or even 1 pct a year) on a 10 year treasury yielding 4.6pct?
3) reckless fiscal policies (as you note), which increases attractiveness of wealth taxes for pols who want to delay their voters learning that they’ll be soaked, too.
4) China investing its surplus in EM (projects, infrastructure) rather than bonds
5) preferences to hold equities over bonds (which could be a productivity/growth story or could merely be irrational exuberance)
6) much of the move is a steepening of the yield curve (a term/risk premium). Not much sign that Europe or US CBs have to intervene heavily in money markets to keep short rates near their targets (though Fed has stepped up short- term intervention).
And the biggest one is probably normalization, as you noted: 4-5 pct rates with 2.5- 3 pct inflation aren’t unusual
Also I doubt the BOJ would have sold (likely underwater) treasuries to fund intervention. They own plenty of t-bills they could sell, they could access swap lines from Fed or they could repo their treasuries and earn positive carry vs market rates of long term yields. Eventually they would let maturing treasuries roll off, though.
John, I apologize for going off on a tangent :) “And Hayek taught us that if we knew why strawberry prices go up and down, let alone interest rates, communism would have worked.”
In 1967 Oskar Lange—a great mathematical economist, who had given one of the first proofs of the two fundamental welfare theorems (Econometrica, 1942)—wrote:
“Let us put the simultaneous equations on an electronic computer and we shall obtain the solution in less than a second.”
Oskar Lange, “The Computer and the Market,” in C. H. Feinstein (ed.), Socialism, Capitalism and Economic Growth, Cambridge University Press, 1967, pp. 158–161.
Notice the lack of movement between the 10 yr UST and TIPS in your chart. If this gap is supposed to be a measure of inflation, why to stability? it is not a measure of inflation expectation. Over many years I have found a moving avg of cpi over five years with the weights of 5, 4,3,2,1 to be quite useful. If one lends someone capital for 10 or 30 years you will likely resort to a more fundamental measure of inflation expectations, not built on asking, but measuring what has happened, actually. Looking at the post accord period, interest rates, currently should be 5%. And if inflation expectations are, say, 3.5%, than current real rates looked through the Lense of inflation expectations, not TIPS, real rates are low, not normal. I suggest using a grown up version of inflation expectations. Eyesight improves dramatically if one has the proper Lense.
Excellent commentary on interest rates and what we don’t know. The Obama treasury really missed an opportunity to lock in super low interest costs on all the debt that rolled over in 2013 to 2015 by issuing long term debt instead of using short bills. shoulda, woulda, coulda. All sorts of assumptions are required, but if the Treasury had extended the average maturity to say 15 years, the savings today would be at least $100 billion per year and would rise from here to maybe as much as $300 billion - if rates continue to inch up across the curve. They should have listened to the professor back in 2015…
“Perhaps we’re just returning to normal. That’s the Wall Street Journal’s interpretation. Over the course of history, 2-3% real interest rates on top of 2-3% inflation is perfectly normal, so 4-6% nominal interest rates are perfectly normal.”
That explanation gets my vote…why shouldn’t savers see a real return when they buy a government bond. Why this obsession with super low interest rates?
There are plenty of people who are saving for retirement, or are already retired and living on the return from their investments. What about them?
Only a complete fool - currently occupying the White House - would always want lower interest rates in all scenarios. But examining the multiple business failures and bankruptcies of the “Trump Organisation” (similar to the Mob, but living on Big Macs not Italian food), we observe a relaxed attitude to borrowing. Trump is constantly stunned when banks ask for interest payments or the repayment of loans.
Let’s all cheer for higher interest rates and appropriate bond yields. The US and other countries are running absurd budget deficits - anything to make the current crop of lunatics in the House of Representatives wake up and smell the coffee… stop pretending you know what you’re doing. Bring down the deficit. Simple solution. Until then I cheer every time bond yields go up a little bit more. But then I remember the 70s and 80s. In the UK government debt was issued with a coupon of 13%, and from memory 15.5%. That’s a rate of interest that wipes the smile off the faces of incompetent weak governments.
I think you are just ignoring the non-financial market news.
Trump's catastrophic mismanagement of the Iran war has exposed the real weaknesses in American military posture. (out of weapons, out of ships) and his chronic inability to act strategically or maintain a course of action for more than a news cycle.
The Straight of Hormuz is a festering sore in the world's trade structure. Not just because of the impact on the petroleum business. My brother is in the import trade business. He has told me that Singapore port is paralyzed by the ships tha cannot move on to the Gulf and that trans pacific shipping is now bollixed up. Way to go Donnie.
But the mismanagement of the Iran war, will undoubtedly cause China to follow through on its threats (promises actually) to take over Taiwan in 2027. The sequela of that catastrophe are even worse than Hormuz. The US and Europe will be forced to sanction China even more heavily than they have sanctioned Russia over Ukraine. The economic consequences of those sanctions will be catastrophic.
But, wait there is more! The invasion will destroy Taiwan's semiconductor business. There are ~80 fabs on Taiwan that represent an investment of ~a trillion dollars, and they produce 60% 0f the world's supply of chips (90%) of the most advanced ones. Chocking off that supply and destroying those fabs will be a far greater blow to economic growth than the effect of Hormuz.
There is more but it will have to wait until later.
I'm not at all reluctant to give agvice on macroeconomic policy, especially if it's the same as microeconomic advice. :) Borrow only to finance activities with NPV>0. Dofferent people will have dierent ideas about how that cashes out in which expenditures to increase or decrease and whihc taxes to raise or lower.
I think you should rewrite your post from around 2015 on growth. "We only have x amount of insurance companies, banks, oil companies etc" We cannot grow our way out of a $40T debt, but cutting govt spending (I know right...) and growing will take pressure off the long end.
Agree, higher (anticipated) AI productivity is the most likely driver.
That also jives with the flow of funds that shows corporates, which over the recent decade had been hoarding cash, have run out of internal funding and are accessing external funds, initially equity (even Google issued stock), and when that has run its course, sold bonds (again, even google).
And just like in undergrad textbooks, that demand crowded out other corp. investment via higher interest rates (the government seems hell-bent on not being crowded out).
US has great productivity. So they had had the best economy engine. But Joe and trump made a law: ria and chips And made many manufactures. These made crowding out effect and misallocation of k,l.
So trump want to use ai to produce the productivity, but I think trump have to stop the chips law and the fiscal active. To recover us' productivity.
Cf) I don't think ai can improve the g. It only show the level effect. Like 1990-2000.
Call it what it is---"A Rake's progress." The long-term Treasury end is giving you a warning. You can heed it, or you can forget it. Tuum est---it's up to you.
My two cents (worth maybe half a cent) is
1) seizure/freezing of assets held by sanctioned countries at the Fed, Euroclear, etc
2) the coming wealth taxes around the world - who wants to pay a 5 percent levy (or even 1 pct a year) on a 10 year treasury yielding 4.6pct?
3) reckless fiscal policies (as you note), which increases attractiveness of wealth taxes for pols who want to delay their voters learning that they’ll be soaked, too.
4) China investing its surplus in EM (projects, infrastructure) rather than bonds
5) preferences to hold equities over bonds (which could be a productivity/growth story or could merely be irrational exuberance)
6) much of the move is a steepening of the yield curve (a term/risk premium). Not much sign that Europe or US CBs have to intervene heavily in money markets to keep short rates near their targets (though Fed has stepped up short- term intervention).
And the biggest one is probably normalization, as you noted: 4-5 pct rates with 2.5- 3 pct inflation aren’t unusual
Also I doubt the BOJ would have sold (likely underwater) treasuries to fund intervention. They own plenty of t-bills they could sell, they could access swap lines from Fed or they could repo their treasuries and earn positive carry vs market rates of long term yields. Eventually they would let maturing treasuries roll off, though.
John, I apologize for going off on a tangent :) “And Hayek taught us that if we knew why strawberry prices go up and down, let alone interest rates, communism would have worked.”
In 1967 Oskar Lange—a great mathematical economist, who had given one of the first proofs of the two fundamental welfare theorems (Econometrica, 1942)—wrote:
“Let us put the simultaneous equations on an electronic computer and we shall obtain the solution in less than a second.”
Oskar Lange, “The Computer and the Market,” in C. H. Feinstein (ed.), Socialism, Capitalism and Economic Growth, Cambridge University Press, 1967, pp. 158–161.
Notice the lack of movement between the 10 yr UST and TIPS in your chart. If this gap is supposed to be a measure of inflation, why to stability? it is not a measure of inflation expectation. Over many years I have found a moving avg of cpi over five years with the weights of 5, 4,3,2,1 to be quite useful. If one lends someone capital for 10 or 30 years you will likely resort to a more fundamental measure of inflation expectations, not built on asking, but measuring what has happened, actually. Looking at the post accord period, interest rates, currently should be 5%. And if inflation expectations are, say, 3.5%, than current real rates looked through the Lense of inflation expectations, not TIPS, real rates are low, not normal. I suggest using a grown up version of inflation expectations. Eyesight improves dramatically if one has the proper Lense.
Excellent commentary on interest rates and what we don’t know. The Obama treasury really missed an opportunity to lock in super low interest costs on all the debt that rolled over in 2013 to 2015 by issuing long term debt instead of using short bills. shoulda, woulda, coulda. All sorts of assumptions are required, but if the Treasury had extended the average maturity to say 15 years, the savings today would be at least $100 billion per year and would rise from here to maybe as much as $300 billion - if rates continue to inch up across the curve. They should have listened to the professor back in 2015…
I think it is the uncertainty, caused mostly by Iran war and tariffs, which is driving down bond prices globally.
“Perhaps we’re just returning to normal. That’s the Wall Street Journal’s interpretation. Over the course of history, 2-3% real interest rates on top of 2-3% inflation is perfectly normal, so 4-6% nominal interest rates are perfectly normal.”
That explanation gets my vote…why shouldn’t savers see a real return when they buy a government bond. Why this obsession with super low interest rates?
There are plenty of people who are saving for retirement, or are already retired and living on the return from their investments. What about them?
Only a complete fool - currently occupying the White House - would always want lower interest rates in all scenarios. But examining the multiple business failures and bankruptcies of the “Trump Organisation” (similar to the Mob, but living on Big Macs not Italian food), we observe a relaxed attitude to borrowing. Trump is constantly stunned when banks ask for interest payments or the repayment of loans.
Let’s all cheer for higher interest rates and appropriate bond yields. The US and other countries are running absurd budget deficits - anything to make the current crop of lunatics in the House of Representatives wake up and smell the coffee… stop pretending you know what you’re doing. Bring down the deficit. Simple solution. Until then I cheer every time bond yields go up a little bit more. But then I remember the 70s and 80s. In the UK government debt was issued with a coupon of 13%, and from memory 15.5%. That’s a rate of interest that wipes the smile off the faces of incompetent weak governments.
I think you are just ignoring the non-financial market news.
Trump's catastrophic mismanagement of the Iran war has exposed the real weaknesses in American military posture. (out of weapons, out of ships) and his chronic inability to act strategically or maintain a course of action for more than a news cycle.
The Straight of Hormuz is a festering sore in the world's trade structure. Not just because of the impact on the petroleum business. My brother is in the import trade business. He has told me that Singapore port is paralyzed by the ships tha cannot move on to the Gulf and that trans pacific shipping is now bollixed up. Way to go Donnie.
But the mismanagement of the Iran war, will undoubtedly cause China to follow through on its threats (promises actually) to take over Taiwan in 2027. The sequela of that catastrophe are even worse than Hormuz. The US and Europe will be forced to sanction China even more heavily than they have sanctioned Russia over Ukraine. The economic consequences of those sanctions will be catastrophic.
But, wait there is more! The invasion will destroy Taiwan's semiconductor business. There are ~80 fabs on Taiwan that represent an investment of ~a trillion dollars, and they produce 60% 0f the world's supply of chips (90%) of the most advanced ones. Chocking off that supply and destroying those fabs will be a far greater blow to economic growth than the effect of Hormuz.
There is more but it will have to wait until later.
I'm not at all reluctant to give agvice on macroeconomic policy, especially if it's the same as microeconomic advice. :) Borrow only to finance activities with NPV>0. Dofferent people will have dierent ideas about how that cashes out in which expenditures to increase or decrease and whihc taxes to raise or lower.
"Sorry, Fred only goes to June for the other countries..."
True enough, though one wonders how could this be so in the information age of real time data?
' We're from the government and we're here to help '