U.S. Treasurys are signaling trouble for the Federal Reserve Board – trouble that it has brought down upon itself and that it has deliberately imposed on the American public. The market in Treasurys is behaving in ways that suggest a growing expectation of stagflation in the U.S. economy.
The relevant focus is the Treasury yield curve. The yield curve refers to the difference between short-term and long-term interest rates on U.S. Treasury debt. When the economy is expanding, this curve typically has an upward slope. The slope is at its steepest during the earliest stages of the recovery. Eventually, as investors anticipate that the Fed will raise interest rates to stave off inflation, the yield cuve flattens, with short-term rates increasing and long-term rates compressed. Occasionally, the yield curve may even invert, when investors anticipate that the outcome of Fed intervention will be recession.
The U.S. economy is currently recovering. Yet the yield curve, far from flattening, is steepening. The spread between two-year and 30-year Treasury yields last week hit a record four percentage points. The implied annual inflation rate over a five-10 year horizon has now moved up above three percent and towards levels last seen when the Fed’s previous rate-rise cycle began in mid-2004.
In June 2004, the U.S. unemployment rate was 5.6 percent, leaving the Federal Reserve with plenty of scope to tamp down potential inflation by growth-reducing increases in interest rates. In January 2011, the unemployment rate is 9.4 percent. Ben Bernanke must now be perspiring heavily in the expectation of pressure from the White House to run the inflation gauntlet. President Obama surely does not want to enter the 2012 election campaign with unemployment in excess of 10 percent and rising. Nor will the Department of the Treasury relish floating new notes with short-term interest rates in excess of 4 percent per annum.
So stagflation is on the way, as I have warned repeatedly in these columns. Thank you Ben Bernanke for helping to wreck the U.S. economy.
Tags: Bernanke errors come home to roost, political pressures favor stagflation., Treasury yield curve steepens in the middle of recovery, US confronts stagflation
January 22, 2011 at 8:22 pm |
Gotta cut spending…State and Federal..
January 28, 2011 at 10:57 am |
Professor Rowley I am more certain than ever that we are heading towards Stagflation just like in the 1970s.
Here in Australia the indicators are also not good. By this I mean that the Reserve Bank has increased interest rates too far… but there is something else.
Our Marxist Prime Minister has seized the opportunity presented by those devastating floods to impose an extra tax on people earning more than $50,000 with the amount of the level doubling for those earning greater than $100k. This is an enormous burden on the community at large because the current government has been extraordinarily wasteful (just like the Whitlam Government).
The purpose of the levy is to raise funds for flood clean up yet that should not be necessary because billions are being wasted on the roll out of fibre optic cable to allegedly get more people onto the Internet (not at all necessary when other technology is available).
The KRUDD-Gillard the Marxist govt began with a budget surplus but that was frittered away in a few months because of the $900 bonus given to those who earned less than $50k…. the rest of us did not see one red cent of that bonus.
This is also about income redistribution, and get this Gillard talks about her proposed levy as being “progressive tax”…. ack I hate the way these people control the meanings of words… it is not progressive at all!!
Anyway, if she gets the green light to rip us off in this manner this will further dampen spending and I believe will send the economy into a bit of a nose dive.
With people who have no understanding of economics it is truly frightening what they are doing to mess up what had been a stable and viable economy.
The ALP is just as bad if not worse than the Dhimmicrats.