Thursday, November 15, 2007

Close Encounters of the Fear Kind

Let's say I have some money and I wish to earn interest on it.

If I am greedy, I might choose to lend it to someone for 30 years so that they can buy a house. There are obviously many risks here (potential rising inflation, getting paid back, and so on). The lower the interest rate I choose to accept (to offset those risks) the more greedy I am.

If I am fearful, I might choose to lend it someone with a printing press so that they can always pay me back. I could offset some of that risk by not lending them for very long periods (say three months at a time). The lower the interest rate I choose to accept the more fearful I am.

This chart, in my opinion, therefore shows the fear minus greed spread between the 30 year mortgage rate and the 3 month treasury bill. The higher the number, the more fear there is.

Here's the odd part. I've seen that chart before.

I know this sounds crazy, but ever since yesterday on the road, I've been seeing this shape. Shaving cream, pillows. Dammit! I know this. I know what this is! This means something. This is important. - Roy Neary, Close Encounters of the Third Kind, 1977

I must apologize. I'm fairly sure this joke is never going to get old to me. Sorry!!

One last thought. This is gallows humor. My girlfriend has been unemployed for about six weeks. Her former employer has not lifted a finger to help her (she can't even collect unemployment because the employer refuses to respond to the unemployment office).

See Also:
Employment Report Shows Stagnation?
"Fresh Inflation"
Motorola Equity Withdrawal (MEW)

Source Data:
FRB: Selected Interest Rates

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