Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19
US China War - Thucydides Trap and gold - 16th June 19
Gold Stocks Bull Upleg Mounting - 16th June 19
Gold Price Seasonal Trend Analysis - Video - 16th June 19
Fethiye Market Fruit, Veg, Spices and Turkish Delight Tourist Shopping - 16th June 19
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Misreading Economic Indicators Leads to Bad Policy

Interest-Rates / US Debt Jun 09, 2010 - 02:54 PM GMT

By: Tim_Iacono


Best Financial Markets Analysis ArticleAll this talk about how borrowing costs are so low that Washington couldn’t possibly be facing any sort of a debt crisis – that the 3.2 percent yield on the ten-year note is somehow a vote of confidence in policies coming out of the nation’s capitol – makes me think that, just as the insane fixation on a low consumer price index was a major contributor to the financial crisis, signals coming from U.S. debt markets are being similarly misinterpreted today and this may ultimately lead to an even bigger crisis in our not-too-distant future.

Misreading what these indicators are saying – or simply reading into them  what one wants to believe instead – has led to bad policymaking before and is likely to do so again.

Perhaps sooner than anyone might think…

For a good example of this, one has only to look back to the middle of the last decade when the housing market was booming and economists across the land marveled at how the Federal Reserve had not only tamed the business cycle and kept prices low, but made nearly every homeowner wealthy to boot!

The central bank’s fixation on the green light being emitted by the consumer price index (and then, unbelievably, fear of deflation in 2002-2003 as home prices were rising at 10 or 15 percent a year) blinded policymakers to the flashing red light of an asset bubble that would meet its pin a few years later.

Similarly, the eagerness demonstrated by many elected officials in Washington to keep making that national debt clock spin faster and higher (with the blessing of most economists) while marveling at how little it costs to keep paying interest on the $13+ trillion tab could be setting the stage for a vicious cycle of sharply higher borrowing costs and even higher deficits.

When “freakishly low” interest rates approach more normal levels, just like when millions of overextended homeowners’ HELOC payments started to bite a few years back, Washington could have a major problem servicing the country’s ginormous debt.

Most policymakers dismiss this idea in 2010 just as they scoffed at the idea of the existence of a housing bubble back in 2003, 2004, and 2005 when something could be done about it.

Have a look at the now classic Bernanke was Wrong video at about the one minute mark where Maria Bartiromo asks the soon-to-be Fed chief about the worst case scenario if home prices were to drop precipitously:

I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is…

What the Fed chief thought was more likely wasn’t even close.

Now, compare that to Nobel Prize winner Paul Krugman’s op-ed not long ago:

Right now, investors don’t seem at all worried about the solvency of the U.S. government; the interest rates on federal bonds are near historic lows…

Brad Delong went so far as to put up a chart of Treasury yields and ask readers:

Look at this and tell me that the U.S. federal government is running up against the limits of its debt capacity…

In both cases, indicators provided signals that economists and elected officials desperately wanted to hear – that inflation was low early in the last decade, so monetary policy was appropriate and borrowing costs are low today, so servicing the U.S. debt isn’t a problem – yet this thinking in 2005 proved to be horribly wrong, prompting the very reasonable question of whether something similar is going on today.

[Note: In one of the more disturbing developments over the last few years, despite overwhelming evidence to the contrary, most Federal Reserve economists have yet to concede that "freakishly low" interest rates were a major factor in the housing bubble's inflation and demise. This remains a very troubling issue for many reasons (not the least of which is that the interest rate pedal has been nailed to the floorboard again for the last year-and-a-half) but, for the purpose of this article, let's assume that "Fed policy" back around 2004-2005 also included the "hands free" approach to regulation and goading potential homeowners into taking the plunge by, among other things, denying the very existence of a housing bubble as detailed in this item earlier today.]

So, flash back to the first half of the 00’s and the relationship between home prices and the CPI (Consumer Price Index) was as shown below. Yes, there were a lot of other things going on at the time, but the government’s official measure of inflation was a major factor when central bank economists deliberated over whether short-term interest rates of one percent were appropriate.

Stripped of anything that resembles home prices since 1983 when the costs of homeownership were replaced by the nefarious “owners’ equivalent rent” (see this 2007 itemfor more on that subject), as the housing bubble was reaching its maximum level of inflation, the vast majority of the nation’s top economists (and virtually all economists involved in policymaking) were much more interested in patting themselves on the back for a job well done rather than considering that the housing-neutered CPI might not be the only thing they should be watching.

Fast forward to today and you’ll hear similar arguments about the relationship between the nation’s growing debt and the yield that bond investors are demanding to hold it as shown below. The not-so-well trained eye of some of today’s crack economists look at this and conclude that, if anything, there is an inverse relationship between the level of U.S. indebtedness and interest rates – the more we borrow, the less it costs!

But, once again, there is a key piece of information that the above data omits and that key piece of information turns the  conclusions that many economists are reaching on its head:

The world is awash in easy money and investors are scared to death!

Where else are wealthy nations, corporations, and individuals going to put their money in a global financial system that appears to be teetering on the edge of  an abyss as it did before falling in back in late-2008?

Well, yes, they seem to be fond of gold lately, but there’s so little of the stuff around…

Over the last couple years, central banks and governments have been flooding the world with money in the mistaken belief that even more easy money will cure the problems created by the excessive easy money policies from a few years ago.

Naturally, doing the same thing and expecting a different result is no way to run a global economy,  but that’s a discussion best left for another day.

Simply put, U.S. borrowing costs are so low because the rest of the world is so freaked out about what they see happening all around them and they can’t think of anything better to do with their money – not because they are blessing the large and growing U.S. debt!

Moreover, the fact that a lot of the most recent easy money is going from the Federal Reserve to big Wall Street banks and then right back to the Treasury Department to purchases U.S. debt (pushing prices up and yields down) should give great pause to anyone thinking that low U.S. borrowing costs are flashing a green light for more borrowing.


Are policymakers that stupid?

As for how the dismal science is being practiced these days, it sure would be nice if economists could factor “common sense” into some of their vaunted models, then they could dial in a little or a lot of it as they saw fit.

By Tim Iacono
Email :

Tim Iacano is an engineer by profession, with a keen understanding of human nature, his study of economics and financial markets began in earnest in the late 1990s - this is where it has led. he is self taught and self sufficient - analyst, writer, webmaster, marketer, bill-collector, and bill-payer. This is intended to be a long-term operation where the only items that will ever be offered for sale to the public are subscriptions to his service and books that he plans to write in the years ahead.

Copyright © 2010 Iacono Research, LLC - All Rights Reserved

Tim Iacono Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules