Click to enlarge.
The black line shows the real interest rate investors earned on the 10-year treasury from the time of purchase (we don't know what the real yield is until 10 years have elapsed). The blue line shows what the real interest rate investors earned on the 10-year TIPS (we know instantly because the rate is the real yield).
If this downward trend kept the deflation monster at bay, then what's going to happen when the trend ends? Put another way, if 4+ years of ZIRP can't generate much inflation then what can? And how might the trend end? ZIRP has a 0% floor and we're glued to it.
As seen in the chart, interest rates are probably "tight" if the 10-year TIPS currently yields more than 0%. It now yields 0.57%. Tight!
Ben Bernanke should have never said the word taper. Just like the Japanese, we can't handle high interest rates any longer.
Want to know how to lock in Jeremy Siegel's mythical 3.5% real yields? It's really quite easy. First, invent a time machine. Second, travel back in time 16 years to July of 1997. And lastly, invest accordingly! Seriously.
Just opinions!
Source Data:
St. Louis Fed: 10-Year Treasury Rate
St. Louis Fed: 10-Year TIPS Rate
St. Louis Fed: CPI
Japan has not found a way out, and while we have better demographics, we haven't found a way out either.
ReplyDeleteThought experiment: if we purged all debt with a good dose of 20% inflation for a couple of years, would that clear the decks for future growth, or are there bigger problems than the debt overhang?
Mr Slippery,
ReplyDeleteHow would you propose that we purge the debt with 20% inflation if ZIRP can't seem to generate 20% inflation?
Serious question.
Let's assume we could though. Would wages go up 20% per year too? Or would they continue to stagnate?
Because if wages don't go up, we've got way too many cars on our highways. Sigh.
if 4+ years of ZIRP can't generate much inflation then what can
ReplyDeleteHelicopter money, e.g. Fed printing the $2.7T SSTF redemption instead of higher income taxes.
Japanese borrowers completely fried the domestic credit system through their excesses of the 1980s.
Bad debt in Japan is a lot more "stickier" than bad debt here.
Demographically we've got the baby boom echo turning 30 now, and they're going to want to be buying houses, and until the bbers die off there will be housing supply-side weakness.
Jaoan's currency doubled between 1990 and 2012, which I think was also deflationary via out pricing Japanese labor rates vis-a-vis E Asian and also putting downward price pressure on imported goods (literally deflationary).
Troy,
ReplyDeleteHelicopter money, e.g. Fed printing the $2.7T SSTF redemption instead of higher income taxes.
$2.7 trillion? Is that all? Supposed net worth went up $3 trillion in just the last quarter alone. You're going to have to throw some bigger numbers at me than that! ;)
Troy,
ReplyDeleteDemographically we've got the baby boom echo turning 30 now, and they're going to want to be buying houses, and until the bbers die off there will be housing supply-side weakness.
And people in hell want ice water, or so they say. Just sayin'.
In any event, my 89 year old mother will be freeing a house up for them shortly. She's downsizing to assisted living.
It's the old analogy of pulling on an elastic band attached to a brick that sits on a table. You pull, and pull, and nothing happens. Then suddenly the brick budges, zooms across the table and smashes into you. That's how high inflation will arrive; rather unexpectedly, and because all attempts to generate mild inflation didn't work until suddenly they worked all too well.
ReplyDeleteI wish our equivalent of TIPS yielded 0.57% real: I'd be buying if they did.
dearieme,
ReplyDeleteYour scenario certainly appeals to my physics nature. I would not rule it out.
My name is Stagflationary but there's a deflationary part as well.
There are demons wrestling for control within my head. They are both bearish. The angels left the building a long time ago (presumably after seeing the first exponential trend failure chart).
How would you propose that we purge the debt with 20% inflation if ZIRP can't seem to generate 20% inflation?
ReplyDeleteI propose a currency and bond crisis in which interest rates and inflation spike to 20%. In that scenario, some jobs would get pay increases, say people working in the energy sector, but most would not.
Debts would be purged through inflation for those with rising wages, default, and bankruptcy (including government debt).
Mr Slippery,
ReplyDeleteI'm clearly not in that camp, at least not within my lifetime (or I would not have bought TIPS and I-Bonds).
1) The economy is not physics.
ReplyDelete2) There was birth rate bump around 1970-72 as the baby boom echo [that's when my kids arrived] and again around 1990, but not much of one in the early 80's.
See graph 2 here.
3) High inflation would wreak economic havoc. Not a good plan, and turning it off would also be its own version of hell.
Basically, we're screwed.
JzB
Jazzbumpa,
ReplyDeleteBasically, we're screwed.
Perhaps we're not screwing (keeping our birth rate high) because we know we're screwed. Oh, the irony.
That's pretty much what the Japanese did once they fell into ZIRP after their housing bubble popped in the early 1990s. Few seem to think it can happen here though. (I think it can and will. Sigh.)