The Price of Money + The bird you most resemble

[Halebop]

US Treasury yields for the last 12 years. Almost 10 years to confirm the trend and then another 2 to break it...



2 years...

[Halebop]

So are we looking at a rising cost of money? Or is it a short term abberation? What are the consequences of more expensive debt?

[skinny]

Yes. What Greenspan called a conundrum and Bernanke calls the "global savings glut" does look like it is unwinding.

A few hypotheses:

1) Financial markets are realising Bernanke is not a cuddly toy despite external appearances (his journal articles would have revealed this long ago but the math is a bit much for your average 20 something year old bonehead trader or Bush administration official ) Most central banks around the world are also in tightening phases.


2) In relation, concern over world inflation (oil) continues to increase.

3) Savings diversification away from the US gains momentum - alternative currencies and commodities are popular now but ultimately the funds will probably be soaked up by Asia itself as financial markets develop in the region. [Note, however, there is a counter argument run by people such as Leeper that the US has a strong competitive advantage in managing other peoples money and hence it will continue to take the lions share of world savings.]

4) US risk premiums rise due to concern over the twin deficits


(1) and (2) imply a rise in the world cost of capital, (3) and (4) are more US specific stories, but hard to isolate spill over effects. My pick is that the world cost of capital is certainly headed north from here and would not be surprised to see long dated treasuries perhaps going back over 6%. The valuation effects of this are obvious, but prefer to sit on cash then go short!

[Halebop]

I don't think there would be much threat in the concept at 6% but up around and over 8% would be getting more exciting.

[Cooper]

Would the consequences be unwelcome, given what we know of some countries savings rates? (Yes I'm looking at you, NZ). It's probably something for the indebted to consider.

What other "fixes" to the problem could there be (or could be engineered) though? Surely changes in relative currencies between net savers and net borrowers would alleviate some of the problem? Or the US accepting that it's currency's special status has changed, and beginning to act accordingly?

[Halebop]

It depends what the real problem is I think. If the real problem is inflation the only response that ever occurs, no matter how long they try to defer it, is a harshly higher interest rate to crush the beast. The longer they defer the bad tasting medicine, the worse it tastes.

So is inflation "structural"? (Is there such a thing?) Or cyclical and soon to recede? Have recent rises by various reserve bankers been enough to assuage the beast?

Its been a long time since I had to invest in an inflationary environment and I had the benefit of ignorance and a speculative equity bubble to insulate my ineptitude. Inflation is nobodies friend. Even gold bugs will struggle to pay the rent with the stuff.

Is inflation only just coming or has it been tamed already? I'm getting uncertain about the resource boom and its impact on financial assets. It might be the golden egg yolk that drowns the goose.

[Cooper]

quote:Originally posted by Halebop

It depends what the real problem is I think. If the real problem is inflation the only response that ever occurs, no matter how long they try to defer it, is a harshly higher interest rate to crush the beast. The longer they defer the bad tasting medicine, the worse it tastes.

So is inflation "structural"? (Is there such a thing?) Or cyclical and soon to recede? Have recent rises by various reserve bankers been enough to assuage the beast?

I don't know if you can ever be sure. They certainly appear to be targetting perceptions of inflation as opposed to overall inflation itself. Is this enough? How close do they have to get it for any extra inflation to be "written off" as an abberation? There is significant talk about the inflationary pressures which aren't being considered, but does this factor deflationary pressures like lower cost production?

I think you'll have to define what you mean by "structural" for me... are you referring to the focus primarily on a low inflation environment or the nature of the fiat system?

quote:
Its been a long time since I had to invest in an inflationary environment and I had the benefit of ignorance and a speculative equity bubble to insulate my ineptitude. Inflation is nobodies friend. Even gold bugs will struggle to pay the rent with the stuff.

I still have the benefit of ignorance, so I should be good...

quote:
Is inflation only just coming or has it been tamed already? I'm getting uncertain about the resource boom and its impact on financial assets. It might be the golden egg yolk that drowns the goose.

I won't ask why the Goose was eating it's own eggs. That's just sick. The question for me is if the same process or structure can be maintained in a different form if expectations begin to develop that inflation is getting too high. Can expectations be reigned back in by changing the structure to provide more accountability or transparency?

So you're saying the resource boom is a result more of inflationary expectations than it is of increased demand?

[Halebop]

quote:Originally posted by Cooper

So you're saying the resource boom is a result more of inflationary expectations than it is of increased demand?

I don't know. But the alleged $120b of "Hot money" playing commodities has less to do with demand than expectations of both demand and inflation.

P.S. Geese are sick, disgustung creatures. They also like Brussel Sprouts and watching Paul Holmes.

[Halebop]

quote:Originally posted by Cooper

I don't know if you can ever be sure. They certainly appear to be targetting perceptions of inflation as opposed to overall inflation itself.

Lets say someone convinces me gravity doesn't exist and so my expectation of gravity is nil. Sooner or later perception and reality will have to collide. Probably at speed. Bet those damned evil geese had something to do with it.

[Halebop]

quote:Originally posted by Cooper

I think you'll have to define what you mean by "structural" for me... are you referring to the focus primarily on a low inflation environment or the nature of the fiat system?

By structural I meant like a relative visiting from the UK. Unwelcome, here for quite a while and much more expensive than anything I envisaged.