If you listen to some market observers, the record low yields in the Treasury bond market are warning us that the American economy is on the verge of falling into the same deflationary abyss of the euro zone and Japan. Like the Chicken Little story, if bond yields are falling, the sky must be falling, too.
With the yield on the 30-year T-bond hitting its lowest level ever last week, even lower than during the global financial crisis, they’re worried that if the Federal Reserve raises interest rates soon, we’ll shortly be back to the bad old days of 2008 and, even worse, 1929.
No less a figure than Paul Krugman, the New York Times’ economics commentator, wrote that the Swiss Central Bank’s move last week to decouple the franc from the free-falling euro is a portent of what could happen to us if we let our deflationary guard down. Continue reading "Chicken Little and the Bond Market"
No matter the debates over inflation vs. deflation, increasing employment vs. sound monetary policy or systemic health vs. fragility (and whatever else is flying around in Jackson Hole this week), the CPI marches onward and upward. That is the system and it is predicated on creating enough money out of thin air while inflation signals are (somehow) held at bay.
