Date: 27-07-2018
Source: The Economist: Free exchange
An inverted yield curve may mean a few things, none of them cheering
AS NAMES for market phenomena go, “inverted yield curve” lacks a certain punch. It is no “death cross” or “vomiting camel”. But what it lacks in panache, the inverted yield curve more than makes up for in predictive potency. Just before each of America’s most recent three recessions the yield curve for government bonds “inverted”, meaning that yields on long-term bonds fell below those on short-term bonds. Economists and stockmarkets seem unconcerned that inversion looms again (see chart). But despite generally strong economic data, there is reason to heed the warning signs flashing across bond markets.
There is nothing particularly magical about the yield curve’s predictive power. Short-term interest rates are overwhelmingly determined by changes in central banks’ overnight policy rates—for example, the federal funds rate in America, which has risen by 1.75 percentage points since December 2015. Long-term rates are less well-behaved. They reflect the average short-term rate over a bond’s lifetime, but also a “term premium”: an extra return for holding a longer-term security.
An inverted yield curve may mean a few things, none of them cheering. Markets may expect future short-term rates to be lower than present ones,presumably because the central bank has chosen to cut rates in response to economic weakness. Or markets may think they need less compensation for holding long-term bonds in the future. That might reflect expectations that inflation will fall, or that appetite will grow for the safety provided in financial storms by long-run government debt. Den Rest des Beitrags lesen »
Many people lost their life savings in the last recession.
New research on the health damage done
Is it worse to suddenly lose your financial nest egg or never to have saved any money at all? This question concerns many of us: A quarter of Americans watched much or all of their life savings evaporate during the last recession, while nearly half of U.S. families have nothing put aside for retirement, according to the Economic Policy Institute and federal data.
Either way, there’s no happy answer. Both scenarios can increase our risk of dying within the next 20 years by more than 50%, a recent study shows.
We’ve long known that a financial shock causes immediate distress. Suit-clad men leaping from buildings were dismal hallmarks of the Great Depression, and soon after a major recession began in 2007, there were notable spikes in clinical depression, substance abuse and suicides. Den Rest des Beitrags lesen »
The biggest problem facing the United States today is the inevitability of the business cycle. Unemployment Friday reached its lowest rate in seventeen years. “Wages not keeping pace,” warned The New York Times. The “historically long jobs expansion… shows little evidence of slowing,” said The Wall Street Journal.
That’s absurd, of course. Alarm bells may not be ringing. The 2017 tax cut stimulus is still working its way into the system. But with the jobless rate at 3.9 percent, wage growth will accelerate. Bottlenecks will form. Interest expenses will grow. Inflation rates will increase.
Sometime in the next two years or so, some combination of factors will force the Federal Reserve Board’s hand. Interest rates will rise more sharply than expected. A recession will begin, with all the usual adverse consequences for Federal and state budgets. Then, as Warren Buffett likes to say, as the tide goes out, we will discover who’s been swimming naked – politically, that is, not financially. Den Rest des Beitrags lesen »
Getting a fever is no fun. You likely get chills, you sweat, and you’re just generally uncomfortable. You get tired easily and need to rest. But here’s the weird part: Fever isn’t the real problem. It’s a symptom of something else. You must treat whatever that is to relieve the fever.
Economic indicators are similar. Lately I see a lot of talk about the flattening yield curve and speculation it might invert as the economy enters recession. If that happens, the inverted yield curve won’t be the culprit. It will point to another culprit, or combination of them.
This is something I watch carefully because a recession is long overdue, if history means anything. Some argue this time is different. Maybe so, but I’m not inclined to bet on it. Today we’ll explore some reasons why.
Now, on with our fever treatment, which of course, brings up a story.
In late 2006, when the yield curve was last in the process of inverting, I put in a call to then New York Fed’s Dr. Fred Mishkin, who co-authored a seminal report reviewing 20 different indicators as recession forecasting tools. They found only the inverted yield curve had any true significance, and then it was generally a year early. Den Rest des Beitrags lesen »
New study finds that all types of recessions lead to permanent losses in output and welfare
Economic recessions are typically described as short-term periods of negative economic growth. According to the traditional business cycle view, output moves up and down around its long-term upward trend and after a recession, it recovers to its pre-recession trend. Our new study casts doubt on this traditional view and shows that all types of recessions—including those arising from external shocks and small domestic macroeconomic policy mistakes—lead to permanent losses in output and welfare.
Nearly a decade after the global financial crisis erupted into the Great Recession, the global economy finally appears to be on the verge of strong growth . Until recently, however, economic growth fell below forecasts of a vigorous rebound, as predicted by supporters of the traditional business cycle theory.
Some researchers have explained the sluggish post-crisis growth as driven by demographic trends or other factors specific to the United States. But such explanation ignores the fact that output dynamics after the crisis followed a similar pattern seen in other countries. Den Rest des Beitrags lesen »
Policymakers normally respond to recessions by cutting interest rates, reducing taxes, and boosting transfers to the unemployed and other casualties of the downturn. But, for a combination of economic and political reasons, the US, in particular, is singularly ill-prepared to respond normally.
COPENHAGEN – A sunny day is the best time to check whether the roof is watertight. For economic policymakers, the proverbial sunny day has arrived: with experts forecasting strong growth, now is the best time to check whether we are prepared for the next recession.
The answer, for the United States in particular, is a resounding no. Policymakers normally respond to recessions by cutting interest rates, reducing taxes, and boosting transfers to the unemployed and other casualties of the downturn. But the US is singularly ill-prepared, for a combination of economic and political reasons, to respond normally. Den Rest des Beitrags lesen »
Date: 14-12-2017
Source: The Economist: Free exchange
Governments skilfully tackled the symptoms, not the underlying disease
TEN years ago this month, America entered the “Great Recession”. A decade on, the recession occupies a strange space in public memory. Its toll was clearly large.
America suffered a cumulative loss of output estimated at nearly $4trn, and its labour markets have yet to recover fully. But the recession was far less bad than it might have been, thanks to the successful application of lessons from the Depression. Paradoxically, that success spared governments from enacting bolder reforms of the sort that might make the Great Recession the once-a-century event economists thought such calamities should be.
Good crisis response treats its symptoms; the symptoms of a disease, after all, can kill you. On that score today’s policymakers did far better than those of the 1930s. Government budgets have become a much larger share of the economy, thanks partly to the rise of the modern social safety net.Consequently, public borrowing and spending on benefits did far more to stabilise the economy than they did during the Depression. Policymakers stepped in to prevent the extraordinary collapse in prices and incomes experienced in the 1930s. They also kept banking panics from spreading, which would have amplified the pain of the downturn. Though unpopular, the decision to bail out the financial system prevented the implosion of the global economy. Den Rest des Beitrags lesen »
Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, Advisory Board Co-Chair of the Asia Global Institute in Hong Kong, and Chair of the World Economic Forum Global Agenda Council on New Growth Models. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence – The Future of Economic Growth in a Multispeed World.
AUG 1, 2017 Project Syndicate
MILAN – In the summer, as life slows down, there is space to reflect on fundamental issues. One of the key puzzles occupying my mind of late is the disconnect between widespread political dysfunction and relatively strong economic and financial-market performance.
Today, the world’s major economies are experiencing a steady recovery, despite the occasional setback. To be sure, economic performance is far from reaching its full potential:depending on where one looks, one can find output gaps, excess leverage, fragile balance sheets, under-investment, and unfunded longer-term non-debt liabilities. Still, financial markets show no signs of convulsion, even as monetary stimulus is gradually withdrawn.
Yet, at the same time, political conditions seem to be deteriorating. Polarization has intensified, owing partly to growing resistance to globalization and the unbalanced growth patterns that have resulted from it. In the United States, for example, the Pew Research Center reports that people not only disagree vehemently with their compatriots on the other side of the aisle; they also don’t like or respect them. Den Rest des Beitrags lesen »
“I never liked quantitative easing. Flattening the yield curve is not stimulative; flattening the yield curve is anti-stimulative.”
– Ken Fisher
“There is a limit to how much the United States Treasury can borrow.”
– Alan Greenspan
“In other words, we have the models we have because of inertia and theology, but also because all we can do is all we can do.”
– Kit Webster
“[T]he specific manner by which prices collapsed is not the most important problem: A crash occurs because the market has entered an unstable phase, and any small disturbance or process may have triggered the instability.Think of a ruler held up vertically on your finger: This very unstable position will lead eventually to its collapse, as a result of a small (or an absence of adequate) motion of your hand or due to any tiny whiff of air. The collapse is fundamentally due to the unstable position; the instantaneous cause of the collapse is secondary.”
Robert J. Shiller, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance, the third edition of which was published in January 2015, and, most recently, Phishing for Phools: The Economics of Manipulation and Deception, co-authored with George Akerlof.
MAY 23, 2017 Project Syndicate
NEW HAVEN – Ever since the “Great Recession” of 2007-2009, the world’s major central banks have kept short-term interest rates at near-zero levels. In the United States, even after the Federal Reserve’s recent increases, short-term rates remain below 1%, and long-term interest rates on major government bonds are similarly low. Moreover, major central banks have supported markets at a record level by buying up huge amounts of debt and holding it.
Why is all this economic life support necessary, and why for so long?
It would be an oversimplification to say that the Great Recession caused this. Long-term real (inflation-adjusted) interest rates did not really reach low levels during the 2007-2009 period. If one looks at a plot of the US ten-year Treasury yield over the last 35 years, one sees a fairly steady downward trend, with nothing particularly unusual about the Great Recession. The yield rate was 3.5% in 2009, at the end of the recession. Now it is just over 2%. Den Rest des Beitrags lesen »
AS NAMES for market phenomena go, “inverted yield curve” lacks a certain punch. It is no “death cross” or “vomiting camel”. But what it lacks in panache, the inverted yield curve more than makes up for in predictive potency. Just before each of America’s most recent three recessions the yield curve for government bonds “inverted”, meaning that yields on long-term bonds fell below those on short-term bonds. Economists and stockmarkets seem unconcerned that inversion looms again (see chart). But despite generally strong economic data, there is reason to heed the warning signs flashing across bond markets.
COPENHAGEN – A sunny day is the best time to check whether the roof is watertight. For economic policymakers, the proverbial sunny day has arrived: with experts forecasting strong growth, now is the best time to check whether we are prepared for the next recession.
The answer, for the United States in particular, is a resounding no. Policymakers normally respond to recessions by cutting interest rates, reducing taxes, and boosting transfers to the unemployed and other casualties of the downturn. But the US is singularly ill-prepared, for a combination of economic and political reasons, to respond normally. Den Rest des Beitrags lesen »