Saturday, November 10, 2012

The Interest Rates of World War II

I posted a chart earlier today and thought it would be interesting to see the same data plotted on a log scale.

Click to enlarge.

Note that we were heading into World War II the last time 3-month treasury bills were yielding so little.

World War II

World War II, or the Second World War (often abbreviated as WWII or WW2), was a global war that was underway by 1939 and ended in 1945.

I'm reminded of a quote.

"I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones." - Albert Einstein

It would seem that World War III will be fought with global debt and monetary printing presses. I think it will be slightly less effective at reducing global overcapacity in steel production though. Just a hunch.

This post inspired by Jazzbumpa's comment seen here.

Source Data:
St. Louis Fed: 3-Month Treasury Bill: Secondary Market Rate


Troy said...

re the previous "What if our economy actually requires continually falling interest rates?" is such a beautiful graph.

The boomer retirement is just getting started so I don't see how we can lower the debt take-on.

The current deficit is arguendo $1.2T/yr. ZIRP is "costing" the SSTF another $100B in lost income but thats neither here nor there I guess.

The top 5% pay $500B in taxes and corps pay $300, so if we doubled the tax burden on these guys we'd cut the deficit down to $400B/yr.

Problem is whither GDP in that rather imaginary scenario. . .

The bigger problem even is that every 10M boomer retirements (@ $40,000 per) is going to add $400B in spending -- current beneficiary count is 50M, but by 2030 that's going to be 80M.

That's another $1.2T/yr in spending!

Mr Slippery said...

From an NBER research paper,

Financial disorders produced extra cycles in rates in the early 1930's; then, with depressed business activity and rapid growth in the money stock during the second half of the 1930's, interest rates declined steeply and did not respond in the usual way to the business cycle. During and after World War II the Federal Reserve pegged U.S. bond and bill yields, indirectly affecting all interest
rates, which explains skipped cycles during the 1940's.

The Fed is also pegging interest rates now, removing market forces. The question is whether the Fed/US gov can do this indefinitely.

If you believe the US is so powerful that it can hold the interest rate basketball underwater for decades to come, then interest rates could remain at zero that long. Japan is the case study.

If you believe the US will eventually succumb to risk weighted market forces for the debt it issues, then the end of zero rates could be a large and violent event. Argentina is the case study. Timing is always an issue.

We are not fighting WW III, but WW D (debt).

Stagflationary Mark said...


That's another $1.2T/yr in spending!

A trillion here, a trillion there, and pretty soon we're talking real money, lol. Sigh.

Stagflationary Mark said...

Mr Slippery,

I know I'm in the minority here, but I actually believe that interest rates would be extremely low had the Fed done nothing. I've certainly been a buyer of treasuries (TIPS, I-Bonds, and EE-Bonds as you know). It had very little to do with what I thought the Fed would be doing. I intended to hold to maturity and I still am.

There is a LOT of money sitting in cash out there and I suspect at least some of it is too scared to lock in low yields and/or is anxiously awaiting higher real yields that may never come.

It's too late to post another "mind blowing" chart tonight, but I stumbled upon a fascinating link between interest rates and manufacturing employment that I'll be posting tomorrow. It does not imply that the Fed is doing any more than simply following the long-term herd, nor does it imply that yields will explode higher in the near future.

That's not to say that I think any chart can accurately predict the future of course.

Jazzbumpa said...

This changes it from a handlebar moustache to a Fu Man Chu.

Do those black droopy clusters represent irrational gloom?

I don't think so. A WW is a pretty good time to be gloomy. And now is a unique and different time in economic history I believe. In the grand scheme of things, this could be a moment of transition.

As Woody Allen out it: "More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly."

Cheers (he said with no sense of irony)

Jazzbumpa said...

I remembered that quote because I posted it once.

Here were my thoughts at the time. Almost two years later, they haven't improved much.


TJandTheBear said...
This comment has been removed by the author.
TJandTheBear said...

Some thoughts:
1) NWIH can the US hold rates down forever via monetization;
2) Japan isn't the case study by virtue of funding sources;
3) Those same funding sources are drying up, too, so Japan may very well blow before we do;
4) Yes, rates would be extremely low had the Fed not acted, but that would be the normal outcome of a severe recession / depression without monetization;
5) Low rates would only benefit truly safe investments, not everything, providing useful market signals for proper resource allocation;
6) That proper resource allocation would lead to a much earlier & stronger recovery.

OT: Food inflation anecdote -- local market & caterer charged the same rate for a complete prepared Thanksgiving dinner over the past decade, but this year it's up 20%.

Stagflationary Mark said...


Do those black droopy clusters represent irrational gloom?

I don't think so. A WW is a pretty good time to be gloomy. And now is a unique and different time in economic history I believe. In the grand scheme of things, this could be a moment of transition.

In the grand scheme of things, the difference between 0.1% 3-month treasury bill rates and 0.01% 3-month treasury bill rates doesn't seem like much to me. On a log chart, the difference is extreme though.

In any event, I agree that the gloom seems relatively rational in both eras.

Stagflationary Mark said...


I believe that low rates will be here for a LONG time. We'll hopefully both be around for a long time to see what hindsight has to say. ;)

TJandTheBear said...

NO... REALLY??? ;-)

Stagflationary Mark said...


Here's a new series of charts that backs my opinion. :)