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Kashkari Warns On Yield Curve: “‘This Time Is Different’ Are The 4 Most Dangerous Words In Economics”
By Federal Reserve Bank of Minneapolis President Neel Kashkari, as posted on Medium
This time is different. I consider those the four most dangerous words in economics.
Today, policymakers are paying increased attention to the so-called flattening yield curve – the difference in yields between long-term and short-term Treasury bonds. For the past 50 years, an inverted yield curve, where short rates are higher than long rates, has been an excellent predictor of a U.S. recession. I
An inverted yield curve is the last perch left for the Kashkari dove to land on. Powell seems to be in the process of breaking it off from the Fed’s ‘tree of life’. Humphrey-Hawkins might shed some more light beneath the canopy.
What’s hilarious, though, is the magical qualities doves impart to the curve: inversion => recession, ipso facto no inversion => lambs gamboling in perpetuity with Goldilocks on sunlit economic uplands. Score another one for the ‘economy-as-a-machine-which-can-be-fine-tuned-to-do-whatever-we-want, but-only-by-we-technocrats’ metaphor.
The term premium is so low because a perpetual QE expectation has been allowed to fester. Every investor has come to expect that QE will be restarted a the first sign of trouble–they rightly assume that the Fed will buy every bad bond when things go South. Since risk is assigned to a “third party” they do not have to price it in to interest rate expectations. Interest rates on the 2 year probably are not going to change that thinking very much –that there will be a recession within the next 10 years and the Fed/ECB/BoJ (if they ever get out of this round and/or don’t own every outstanding share)/PBC will bail everyone out again.
The best argument against raising rates is that there are too many zombies that will croak because they will not be able to roll over their debt and/or hack the payments. Strong dollar will crush EM’s with too much dollar denominated debt –this is the problem with a) massive debt financing to stimulate anemic growth where b) productivity and real wages are flat c) ZIRP and NIRP accentuate the moral hazard problem of a) by driving investors to look for yield in all the wrong places and d) the main beneficiaries of the policies have no real incentive to raise their consumption –they don’t know what else to buy. QE is easier started (and that was far more difficult than is generally imagined) but how to get out of it? This will end badly now but worse later –when labor force/retirement demography is even more problematic. Rolling over 247 trillion will seem like child’s play 5 years from now.
Inversion!
“So called yield curve” and policymakers together is one of the funniest things I have ever heard. Talk about head in the sand, it is more like your head up your ass. Wow.
“We don’t know”…That sincerely is the most logical thing i have see a policymaker admit to.