28 November 2017

Flat Chested

The hawks, whether chicken hawk war monger (I'm talking to you Orange Julius Caesar) or zealous monetarists, are always walking around with their chests pumped up and out, saying "Look at me Snowflake!!!" Well, avid reader will recall warnings in these endeavors that, if those fakirs get their way (I'm talking to you McConnell and Ryan, too), you'll see a rate inversion that will blow a whole in your head.

Today's news brings some mainstream reporting inching closer to confirming that eventuality.
Finally, an inverted yield curve has predicted the past 7 recessions. Flattening isn't the same thing as inverting, but it is one step closer. Morgan Stanley notes that "we are not on recession watch now, and peg the 12-month probability of recession at 25% ... [but] by 2020, that probability grows to near certainty."

Note that the author makes the common mistake: asserting that the Fed "controls" short-term interest rate. It doesn't, in fact. The Fed coaxes the really short-term rate(s), but hasn't the power to set any rate by fiat. And, as mentioned here more than once:
Concurrently, as global central banks expand their balance sheets, that puts downward pressure on long-term rates.

Note, again, that it's not just central banks sending moolah into their economies through buying up existing instruments (thus generating more moolah in hands already holding more idle moolah than they can invest in physical capital), it's also the MegaCorps sitting on trillions of idle moolah, too. As they say in Econ 101: supply and demand work to set the market clearing price. That price isn't guaranteed to be in the medium, much less long, term benefit of the entire economy. In the end, all that idle moolah bids up Treasuries even more, and crushes interest rates. I'll remind gentle reader that the Right Wingnut Donor Class will soon be pressuring for fixed rate instruments, rather than auctioned. And take away holding time restrictions on capital gains, naturally. Much like Orange Julius Caesar's tax cut, most of the benefit often goes to the 1%.

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