Thursday, May 28, 2009

It looks to me like a very normal cyclical development.

From The Angry Bear:

"Yield Curve

By Spencer:

The yield curve is strongly positive, and this is getting all kinds of blog comments.

They range from Arnold Kling saying "in my view, this is perfectly rational, and it shows that the short-run effect of the fiscal stimulus is negative"

To Greg Mankiw saying "that it signals future economic growth. In many ways, however, this is an unusual downturn, so it is not entirely clear to what extent historical relationships are a useful guide going forward'

It looks to me like a very normal cyclical development. For example according to this traditional indicator of what drives the yield curve the surprise ought to be that the yield curve is so flat.

I'm inclined to go along with Mankiw on this one and can not understand how this support Kling's conclusion that this demonstrates that the impact of fiscal stimulous is negative.

After responding in the comments section I thought I would add this chart to demonstrate my point. At the bottom in December the bond market was discounting a deflationary, depression.
Now it is discounting an economic recovery. It is a normal cyclical development.


Don the libetarian Democrat says:
Today, 3:33:25 PM
I don't understand the problem. From the point of incentives, you want:
1) Short term rates to stay low, giving investors a disincentive to buy govt bonds, but rather stocks and corporate bonds.
2) Longer term interest rates to be rising, so that investors will buy longer term bonds and feel confident about a recovery.
Both of these are designed to attack the Fear and Aversion to Risk, which Bernanke believes is central to this crisis. I don't know what people expected, but that's what's happening, and I think that it's working. Slowly.
Similarly, infrastructure investment is meant to show confidence in the future. A tax break for investment would presumably also be to attack the Fear and Aversion to Risk, by providing an incentive to invest now. I also favored a Sales Tax Holiday, to give people an incentive to spend now.
I can see people disagreeing with my views, but I don't see that they are a priori false.
By the way, this seems to follow from remarks by investors like James Grant, who see the current situation as a buying and investing opportunity, especially for Value Investors.

Don the libetarian Democrat says:
Today, 7:03:34 AM
"Rising long term interest rates will stifle both the economy and corporate profitability."

It 'will' at some point, but we are nowhere near those rates of interest yet.

"both could be happening at the same time. "I think it is probably a little bit of both, discounting the supply of new debt, but I detect...there is a pick up in confidence about the future," said Fisher."

Thanks for the reference. That's what I'm saying. This is how it's going to work. We've just gone through a panic. Investors are still overreacting at the slightest doubt, which is why they're worried about much higher interest rates going forward. Yet, it is also showing confidence about the future, which is how it's supposed to work. The connection with interest rates on home loans is a little more problematic. It doesn't mean that they'll have to shoot up immediately, but, eventually, they will rise. By the way, I don't think holding down mortgage rates is a good idea.

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