Larry Summers Wants To Give You A Free Lunch
By Tyler Durden
Submitted by MN Gordon via EconomicPrism.com,
The existing capital stock continues to be frittered away at the expense of savers and retirees. Nonetheless, central bankers don’t give a doggone about it. This, after all, is one consequence of roughly eight years of near zero interest rate policy.
Another related consequence is that the pricing equilibrium of capital markets has broken down. In particular, bond yields no longer reflect a market determined price of money established by the economy’s demand for credit. Hence, previously unfathomable interest rate movements are now happening with regular occurrence.
Presently, the yield on the 10-Year U.S. Treasury note is sliding into the abyss. On Wednesday a new record low yield of 1.34 percent was reached. This is the lowest historical yield we could find based on a review of 10-Year Treasury rate data going back to about 1870.
The last time the interest rate cycle bottomed out was during the early 1940s. The low inflection point at that time was somewhere around 2 percent. Where and when rates will finally turn this time is anyone’s guess.
In the meantime, who in their right mind is plowing their hard earned money into Treasuries at these negligible returns? Obviously, it’s better than the negative rate of return that Swiss 50-year bonds are yielding. But come on. Is it not conceivably possible, with the Fed’s desired 2 percent inflation target, that inflation could run-up above 1.34 percent at some time over the next decade?
A Matter of Life or Death
By way of full disclosure, we’ve been anticipating the conclusion of the great Treasury bond bubble for about 8 years – possibly longer. After a 25-year soft slow slide down from a peak above 15 percent in 1981, it only seemed logical that yields would bottom out around 2 percent and then resume a new, generation long uptrend. So far this hasn’t happened. Yields, in practice, have gone down…and then they’ve gone down some more.
In hindsight, we’ve come to recognize that for a number of years we didn’t fully appreciate the significance of one very important component to this credit cycle. Moreover, it’s something that’s unlike the last credit cycle.
Specifically, with a fiat based paper money system, and extreme central bank intervention, we didn’t account for just how far the limits of illogicality could push beyond what is honestly conceivable. Perhaps a better imagination was needed.
Over the last few years we’ve made painstaking efforts to recalibrate our expectations. Namely, we’ve done away with them.
But just because we have no expectations doesn’t mean we are indifferent. To the contrary, we are far from indifferent. We observe 10-Year Treasury yield movements with the same acute interest we observe an amorphous skin discoloration appearing on our torso.
What do each day’s slight changes mean? Will they eventually become a matter of life or death? These are the questions. What are the answers?
Larry Summers Wants to …read more
Source: Larry Summers Wants To Give You A Free Lunch
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Posted July 9th, 2016 in Uncategorized.
