"Its different this time."

Wednesday, June 08, 2005 | 07:32 AM

Make no doubt about it -- thats precisely what Alan Greenspan said about the "puzzling decline" in long-term rates.

In the past, a decrease in yield on the 30 year was a signal of upcoming economic weakness. The Fed Chair argued that "they aren't as reliable a signal of such weakness as in the past."

You see, "its different this time."

But is it really? We looked at the 4 factors impacting rates, and some things have changed: Most prominently, the incredibly dumb decision to stop issuing 30 year bonds. But the rest of the forces we see impacting bonds: global labor arbitrage with Asia exporting wage deflation, as well as the Asian purchases of Treasuries -- are long standing factors.

So why believe that its "different this time?" The WSJ suggests:

Since June 2004, the Fed has raised its short-term rate target to 3% from 1% and has signaled plans to raise it further, while the 10-year Treasury bond yield has fallen to less than 4% from 4.7%. That sort of decline in long-term rates "is clearly without recent precedent," Mr. Greenspan said via satellite to the International Monetary Conference, a meeting of bankers from around the world, in Beijing.

You know what else is clearly without recent precedent? A Fed trying to manage their way through a post-bubble environment by hyper stimulating growth via ultra-low interest rates and increased money supply.

Why the Fed Chief has invoked 9/11 as the reason for putting the world awash in liquidity, he should consider the only thing different this time is him and the Federal Reserve.

The last comparable bubbles -- 1929 in the U.S. and Japan in 1989  -- didn't see the massive liquidity inflows this Fed geenrated -- nor the problems the "Free Lunch" ultimately creates.

I do not advocate a return to the Gold standard like Greenspan's Objectivism hero (Ayn Rand) favors -- but I have to admit that I see their point. This massive manipulation of the global economy by the U.S. Central Bank has the potential to be enormously disruptive.      

Conundrum? Hardly.

>

UPDATE JUNE 8, 2005 4:33PM
Great minds think alike -- Northern Trust's Daily Economic Commentrary was titled "Yield Curve Message - It's Different This Time?"


Here's the accompanying graphic:

Interest Rate Spread: 10-Year Treasury Bond Less Fed Funds Rate (3-month Moving Average)

% ISM Mfg: New Orders Index, 3-month MovingAverage SA, 50+
click for larger chart
Different_this_time

 

>
>

Sources:
Greenspan Casts Doubt on Import of Falling Rates
GREG IP
THE WALL STREET JOURNAL, June 7, 2005; Page A2
http://online.wsj.com/article/0,,SB111810654326352488,00.html

Yield Curve Message - It's Different This Time?
Paul Kasriel, Asha Bangalore
Northern Trust, June 08, 2005
http://www.northerntrust.com/library/econ_research/daily/us/dd060805.pdf
>

Wednesday, June 08, 2005 | 07:32 AM | Permalink | Comments (9) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

bn-image

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00d8347dee2569e2

Listed below are links to weblogs that reference "Its different this time.":

Comments


Interesting, but you left out what the pitfalls of all that liquidity are. Care to finish that thought for your non-economist readers?

Posted by: royce | Jun 8, 2005 8:26:36 AM

The comments to this entry are closed.



Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      

Archives

Complete Archives List

Blogroll

Blogroll

Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:


Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites

FeedBurner


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo

Disclaimer

Disclaimer

Odds & Ends

Site by Moxie Design Studios™

FeedBurner