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Long-term treasuries have shot up, causing the 30-year bond yield to plunge to 3.7% today. This seems to be a massive flight to safety following the deflationary news this week combined with the implosion of the auto industry along with the rest of the stock market. Yields are now at historic lows, implying an expectation of very (unrealistically) low long-term inflation. What are the markets thinking?
How much farther can the long bond yields drop? Japan has somehow produced large amounts of government debt with very low long-term bond yields--it seems like the markets are almost anticipating the US to go that route. Could the US follow? What kinds of policy decisions would indicate that the US is headed that direction?
The Obama administration is, of course, looking to avoid a deflationary spiral or a situation like Japan in the 90's. What is the most likely course of action for them to get us back on an inflationary path, and how soon will the strategy begin to work?
For long-term bonds, we have some competing factors which I don't fully understand. On the one hand, we have rumors that as part of a quantitative easing strategy the Fed will buy large quantities of long-term bonds. On the other hand, we have had large issuance of bonds to finance deficit spending, and it seems like there should be continuing large increases in the supply of long-term bonds due to near-certain large government stimulus packages next year. Certain money supply numbers have been skyrocketing, yet banks are hoarding cash.
In a worldwide slowdown, how long can the US continue to find buyers for large issuances of long-term debt? How does it make sense for the Fed to buy long-term debt while at the same time the US issues debt to pay for stimulus?
Doesn't the government want to induce inflation very soon? Is it really that hard for the government to do it? Birds do it, bees do it, and Zimbabwe does it, after all.
How much farther can the long bond yields drop? Japan has somehow produced large amounts of government debt with very low long-term bond yields--it seems like the markets are almost anticipating the US to go that route. Could the US follow? What kinds of policy decisions would indicate that the US is headed that direction?
The Obama administration is, of course, looking to avoid a deflationary spiral or a situation like Japan in the 90's. What is the most likely course of action for them to get us back on an inflationary path, and how soon will the strategy begin to work?
For long-term bonds, we have some competing factors which I don't fully understand. On the one hand, we have rumors that as part of a quantitative easing strategy the Fed will buy large quantities of long-term bonds. On the other hand, we have had large issuance of bonds to finance deficit spending, and it seems like there should be continuing large increases in the supply of long-term bonds due to near-certain large government stimulus packages next year. Certain money supply numbers have been skyrocketing, yet banks are hoarding cash.
In a worldwide slowdown, how long can the US continue to find buyers for large issuances of long-term debt? How does it make sense for the Fed to buy long-term debt while at the same time the US issues debt to pay for stimulus?
Doesn't the government want to induce inflation very soon? Is it really that hard for the government to do it? Birds do it, bees do it, and Zimbabwe does it, after all.
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