Mar

24

A belated answer to the questions I have received about how "this time" can be different regarding the yield curve. My hopeless antiquarian bias tells me that the present trading in "fiat currencies" acts very much the way London, Paris and New York's exchanges behaved in the era of what academics call the gold standard. In actual commerce 150 years ago, "the money supply" was, as it is now, the amount of "good" credit that traders were happy to clip, shave and discount to each other. Gold and silver coin - what was, in the fantasy of Rothbardian history, the only money that mattered - had so little importance that it was shunted off into a room of its own away from the open trade and regular order spaces of the NYSE. Credit was all. Gold was not even the unit of account for the U.S. Prices for stocks, bonds and gold itself were quoted in "paper" dollars, not the dollar equivalent of sterling. The prices on the slate at the gold room were the premiums to be paid in greenbacks for an ounce of "real" money. Our present world does not have an absolute monetary standard; but it shares completely the circumstances of that period: all credit paper being used in trade and government borrowings was actively discounted against one another using prices set by an integrated foreign exchange market. In that period - the 40 years up to 1914, the term structure of U.S. dollar borrowings spent almost all of its time being "inverted". The commercial paper/call loan rate was equal to or higher than the railroad bond yields.

If, as is predicted, the world's extraordinary population growth of the last two centuries is coming to an end, then the primary driving force for what academics call inflation is being removed from the global political economy. If, because of the renewables and greatly improved drilling and transportation technologies, the supply of energy is expanding faster than its demand, the inescapable component cost of all goods and services is likely to decline - as it did in the last third of the 19th century. Quantitative easing and tightening matters to markets because "everybody knows" that central bank credit is the regulator of consumer borrowing and business investment, even though the correlation between the amounts of private borrowings and bank reserves has disappeared. In Europe government bond interest rates can be negative because the primary risk is not that governments will default but that government debt will be the only place where private savings can safely hide in plain sight without fear of tax collection amounting to confiscation. In Japan it is not the tax man savers fear but longevity itself. In a world of negative returns the incentive is to keep more and more money on hand. Against these deflationary forces, there is the threat of MMT, not theoretically but as practiced in China. But their credit expansions cannot be exported to the rest of the world; like QE in the West the lending is a perpetual motion swap of old bad debts for new never to be paid off ones.

If inversions were, in fact, a certain indicator of "recession" (in the 19th century they were not precise; declines were called "slumps" and "panics") the United States could hardly had managed a per capital economic growth that still outpaces China's remarkable record for the past quarter century (even if you take their numbers at face value).


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