Saturday, November 3, 2007

Real Interest Rates

This chart shows the interest rate on the 1-year treasury bought one year ago vs. the inflation as shown in the CPI-U from one year ago.

This chart shows the real yield you received on your one-year treasury purchased one year ago. The shaded areas show economic contractions.

As of one year ago things seem in relative equilibrium. This is very much looking into the rear view mirror (current data isn't possible because we don't know what the inflation rate will be for the next year yet, so therefore we don't know how 1-year treasuries purchased today will actually do). I'm of the belief that negative real rates of return push people into hoarding hard assets. I did from 2004 to 2006 (owning physical gold and silver). People are still doing it. If I had to guess, and this is only a guess, something breaks, we slip back down into negative territory again, and then we resume the second leg upwards as people once again flock to hard assets (second half of the 1970s) as the Fed drives down interest rates in response, again.

However, one could also argue that with the housing market on such shaky ground and debt situations quite unlike the 1970s, deflation might win. If so, then I'd expect real rates of return to rise as dollars become the thing to hoard. I think my current poll shows this uncertainty amongst the bears rather well. I'm certainly uncertain.

As an optimist, one could argue that good times are ahead of us again, much like the early 1980s. I'm not of that belief. I think we've spent way too much building homes for ourselves and not nearly enough on making ourselves more competitive (other than letting our dollar fall to make what we do export become cheaper to others). I could be wrong though of course. In any event, if we do return to the early 1980s I wouldn't expect to get there without a recession. That's what helped the one-year treasury attain such phenomenal returns (as is clearly shown in the chart). Hard assets were breaking down.

(As a side note, the vote for productivity miracle is not one I would heckle. As a stagflationist, it is something that I have to concede is possible and have done so on numerous occasions.)

Just opinions!

For more current real interest rate information that is somewhat forward looking (as if anyone can truly predict the future though) instead of rear view mirror looking, see The Death of Real Yields v.2.

Source Data:
FRB: Selected Interest Rates
St Louis Fed: Consumer Price Index For All Urban Consumers: All Items
National Bureau of Economic Research, Inc.


Anonymous said...

Perhaps off-topic, but in regards to productivity. . .Every now and then we hear about productivity gains as one reason for the purported strength of the US economy. But in light of the fact that real per capita income growth in the US has trended down in recent years it seems like "productivity gains" on the back of declining incomes describes a sickening patient rather than something to crow about. Or am I missing something?

Stagflationary Mark said...

I'm with you kwark.

If we automated each and every job away that would imply maximum productivity. What would people who have not invested in the miracle do for work and/or income?

Ideally, this could still be okay I suppose if everyone invested in the miracle. Unfortunately, the people least capable of investing (the poor) are also the first to feel the pain of automation (farm workers, outsourcing, automatic scanners in grocery stores, ...).

Income inequality growth strikes me as a symptom of a sickening patient, as you put it. If one looks to other countries with higher income inequalities it doesn't inspire confidence that we are on the right path.

Just my opinion of course.

Anonymous said...

Obviously I agree. The propensity for economic reporting to describe as only positive such "productivity gains" is, to me at any rate, a refection of the disconnect between an "economy" that is described and valuded primarily by the consequences of people's labor and an "economy" that is described and valued primarily by capital flow.

Great blog, by the way. Don't know why you don't receive more comments!

Stagflationary Mark said...


Thanks for the kind words.

The quality of the comments is far more important to me than the quantity of comments. I'm quite pleased!

And when I say quality, I mostly mean civility. It is perfectly fine to disagree with me (and/or each other) of course. I often disagree with myself, especially as it relates to the inflation/deflation debate!

I should also add that since I use sarcasm often, I'm not exactly setting the bar very high on civility I suppose. I should therefore be thankful the comments have risen above it! ;)

That being said, if the wildly optimistic Larry Kudlow's of the world started posting here I would welcome their thoughts and would be more than happy to debate them. If nothing else, there's always the chance I could be wrong.