Kleion says How to Avoid a Recession? Cut Interest Rates Like It’s 1995.
One of the most reliable harbingers of U.S. recession—short-term interest rates on U.S. Treasury debt higher than longer-term yields—has been flashing warning signs for months. That doesn’t mean the economy is doomed to a downturn.
So-called yield-curve inversions have preceded every U.S. downturn since the 1950s, with only one false positive in 1966. This past week, the yield on two-year Treasuries briefly surpassed the yield on 10-year notes for this first time since 2007. The most straightforward explanation is that traders…
Absurd Notion
The rest of the article is behind a paywall, but I can tell you with 100% certainly Klein’s notion is absurd.
Inverted yield curves do not cause recessions. They are symptoms of a buildup of excess debt or other fundamental problems.
Those problems will not not go away if the Fed “cuts rates like 1995” or even like 2008.
If a zero percent interest rate stopped recessions, Japan would not have had a half-dozen recessions in the past decades that it did have, many without inversions.
Not even negative rates can stop recessions.
The Eurozone, especially Germany, has negative rates. Yet, it’s highly likely the Eurozone is in recession now and even more likely Germany is (with the rest of the Eurozone to follow).
Monetary Madness
As a prime example of global monetary madness, witness Inverted Negative Yields in Germany and Negative Rate Mortgages.
Even if the Fed made a 100 basis point cut (four quarter point cuts at once), what the heck would that do?
Stop recession for how long? Zero months? Six months? And at what expense?
What Then?
Yes, what then? Negative mortgages? A 10-year yield of -1.0% like Switzerland.
And if that doesn’t work?
Hello @M_C_Klein What then?
Central banks are the source of problems, not the cure. If central banks could stop recessions, there never would be any!
Mike “Mish” Shedlock
From David Rosenberg today:
If you look deep enough, the equity market is sending the same weak-growth message the bond market is flashing. The cyclically-sensitive sectors of the SPX are back in deep correction terrain, down 18% from their highs.
I was remiss in not adding the 17% plunge in CRB metals to what the yield curve and cyclically-sensitive stock market index have accomplished. If it’s “no recession”, then it’s one rung up from that…as in, “stall speed”. Either way, deflation is the primary risk.
Corporate Debt Is at Risk of a Flash Crash
Things are not that bad. The ONLY thing that the FED can do is ease policy/drop rates. If they move to drop rates further, there is just no ammunition left if and when things get tough. Right now, it just seems we should hold. I am not even sure that RAISING rates a tad would be a bad idea. Again, we are not in crisis mode, and the Fed needs to have some room to play if we need to head to the mound for a relief pitcher.
If things REALLY get tough, well, I suppose we can crank up the printing press if needed, as the FED will have run out of options if rates continue to be reduced.
Poor policy, and will eventually be viewed as poor planning and poor politics.
It is called a business cycle for a reason. Economies expand, then contract.
I don’t recall the 1995 rate cut as cutting like mad. The FED had doubled the rate from 3 to 6%, then backed off of that some. By the end of 1996, Greenspan was complaining of irrational exuberance in the stock market. Greenspan then set up a 76% crash in the Nasdaq, with a 3/4 point rate cut in 1998.
We don’t have business cycles. We have credit cycles. (courtesy of Peter Boockvar)
re: Central banks are the source of problems, not the cure. If central banks could stop recessions, there never would be any!
As an actual fact, there are far less recessions and depressions now, and far less severe ones, than there were in the days prior to Central Banks. That is indisputable. The question is why? Is it because the Central Banks are marginally effective? Is it because the economy is bigger now, and thus has more momentum, making a depression less likely? Is it because the Central Bank, while it can’t prevent a depression, they can postpone it, and the ultimate cost will be a much bigger, and more severe total collapse?
“As an actual fact, there are far less recessions and depressions now, and far less severe ones, than there were in the days prior to Central Banks.”
The 2000’s had two recessions, in 2001 and 2008. There were back to back recessions in 1980 and 1981. The greatest depression occurred after the creation of the FED.
The US had major depressions in 1796, 1807, 1819, 1837, 1857, 1873, and 1893. In addition there were recessions in 1785, 1789, 1802, 1812, 1822, 1825, 1828, 1833. Not much is known about recessions between 1840-1900, but it is believed there were between 5 and 10 recessions in that time period.
During the 125 years prior to the creation of the Fed there were 7 depressions, an average of one every 18 years. In the 110 years since the creation of the Fed there have been only two, 1930, and 2008. In addition to having far less depressions, there have also been far fewer recessions in recent years. The facts are indisputable. The question is, as I asked above, why?
It always cracks me up when people make the absurd claims that if we didn’t have the Fed, we wouldn’t have recessions and depressions. Read the Bible, and you will find that they had depressions 3000 years ago. There have always been depressions and recessions, but in the last 80 years ago, there have been remarkably few, and mild ones. Again, I ask, why? Is the Fed really getting good at managing the economy? Is the economy so big, it has enough momentum to coast through? Or, are are simply postponing them, setting up for a truly epic depression?
Since no one cares to answer my question, I’ll give my answer. Kondratiev believed that the capitalist system worked efficiently, and that while excesses built up, periodic depressions purged out those excesses. For example, people are tempted by debt, but in a depression they learn that too much debt is a bad thing, and that it is wise to save for a rainy day, and avoid debt. Since we have managed to avoid severe depressions since the 1930s, we have avoided purging the excesses out. Without the hard lessons of a depression, the excesses just keep getting bigger and bigger, and Americans keep getting deeper and deeper in debt.
In time a depression will come, and when it does, it will be massive, and hard lessons will be learned, both about the reasons for avoiding personal debt, and the reasons for avoiding governmental debt. Since I gave my answer to my own question, I’ll leave another. Will the severity of the economic collapse regenerate the capitalist system? Or, will it be so severe, it destroys the country?
I would point out that despite the higher frequency of recessions in the pre-Fed era, real per capita wealth increased at a much faster pace before the Fed began operating. And contrary to the Fed-run monetary system, prices were actually stable in the long term (even though they were occasionally quite volatile in the short term, usually in the context of war).
Anyway, I happen to agree with you that the lack of economic purges in the modern era has fostered the build-up of ever greater imbalances and this will eventually result in an extremely severe crisis. An interesting study on this very idea was published in an economic journal in the 1980s (name escapes me now). I’ll try to hunt it up and will post a link to it if/when I find it.
Almost everything mentioned in the Bible that corresponds somewhat to recessions (Joseph and the 7 fat followed by 7 lean years is the most prominent example) were brought on by natural catastrophes (mainly droughts) and war/conquest. However we do know they had the custom of jubilee years (which according to Jeremiah and Chronicles was the reason for the Babylonian captivity: compensation/punishment for not observing jubilees).
During the bronze, there were periodic proclamations of debt forgiveness, usually at a coronation, in which agricultural debts were cancelled. One of the reasons was because you could only raise an army from among land-owners; serfs don’t care who the ruler is. Another reason was to “restore order”; the land reverted back to the original inhabitants (“owners”) unencumbered. We do know that the economy flourished and prospered subsequent to such debt jubilees, although they were not popular with the aristocracy.
Agricultural debts tended to result from adversity (weather), and interest rates were about 20%. Credit was not limited by (private fractional) reserve banking and tended to be denominated in barley (IOU’s). Parallels to current credit cycles are not simple to draw out, but it is interesting to see that debt and debt-bondage were so problematical that only periodic debt cancellations could restore a functional society. Also interesting to note how well Japan and Germany have raised themselves from the dead.
Of course, capitalism had yet to be invented. The term was actually coined by Marx, who, contrary to his detractors, thought it was the greatest thing ever, with the exception of what would develop next.
Primarily it is because “recessions” and “depressions” are synthetic measures decided upon by central banks, and governments, themselves. In part arbitrarily, and in part to make it easier on themselves to pretend they are doing something useful. Making sure people get taller and taller “because of” government involvement in nutrition, is a lot easier if you can debase the meter, after all…..
At the very minimum, and even if you for some reason want to give them every benefit of every possible doubt, the mere fact that the definitions of “recessions” are “depressions” are grossly simplified aggregates of the real world, means the aggregates themselves are much easier to game. I doubt even Lenin, or Krugman, or Xi, would expect much success attempting to tailor monetary policy to each individual, in order to improve each of their individual well beings. And yet, unless you can achieve such a global win-win-win, you are inevitably stuck making arbitrary decisions about discounting some people’s economic pain, while arbitrarily postulating it is being made up for, by someone else’s supposed gain.
So, central banks and governments don’t even bother attempting to optimize for that kind of individualized global economic wellbeing. Settling for instead making up easier measures, which they can easier manipulate; and then insist their made up measurers somehow represents people’s actual, experienced economic reality. Which it, of course, never fully will. And, additionally, as a necessary function of central banks getting better and more experienced at gaming the measures they made up themselves, it does less and less. So you’re moving towards a world where all official measures look better and better, yet the individual economic actors supposedly represented by those measures, are somehow experiencing the exact opposite. Just like the Soviet Union anno 1980, and the US anno Trump?
Good question. One would need a deep knowledge of the history to find definitive answers. Count me out. One guess at part of the puzzle, though: the ability to create wealth, and the amount of existing capital, in 1980 versus 1880 is no comparison at all. By every measure, everyone in 1880 was impoverished compared to an American in 1980. So, abstractly one would expect there to be fewer macro “hard times” in modern history than in previous centuries — just based on the fact that our base of capital and our ability to produce new wealth is something that societies of previous centuries could not even dream of.
How far below zero would rates need to go to for a student loan to pay the entire cost of one year of college? -30% on a $100k loan? Maybe -50% if you have a low credit rating? Ka-ching!
Yield curves lost all meaning decades ago. They reflect what the CBs are doing. Not what the economy is doing.
This is completely in line with Central Bank logic. If the economy is doing well, there will be plentry of capital and interests rate will be low, but if there is adversity and natural disasters, capital will be scarcer and interest rates will rise. Economists think they can reverse cause and effect, so if there is a recession, they think you can combat it by pushing more money/credit/capital into the system.
It’s like the rain. When there is enough rain, the street is wet. So if there is a drought, it is only logical to make sure the street is wet in order to make it rain. In the same way, it is completely logical to drop short term rates far enough that the yield curve on the short end will be lower than on the long end, thereby gunning the economy’s engine and preempting any recession.
Trump actually could avoid a recession, by replacing Fed Chair Powell with somebody who really obeys Trump: cut the interest rate to Negative and institutes Negative rate mortgage, which will launch a new bull market on Everything.
Wouldn’t that just delay the popping of the bubble?
Because of the delay, even if they cut rates now, the effect won’t be felt until after the election. That causes a big problem because, if you cut rates as a recession begins, the stimulus kicks in just as the recovery is starting anyway, taking you directly from recession to bubble, which in turn leads to another recession.
I can hardly wait to see who “THEY” blame all this on.
Trump is a symptom of political sclerosis, not the cause of the disease itself…the same is true of yield curve inversion…
The tariffs are not what is causing the yield curve to invert. TDS people would like to think so. AS I have pointed out before a 25% tariff on $600 billion of Chinese imports is an increase in costs of $150 billion out of a $20 trillion economy. Really do any of the TDS people use facts before they spout off? The yield curve is primarily inverted because there are $15 trillion in negative yields govt bonds. This drives up the price of our bonds primarily the long bonds there is an increase in demand from those fleeing negative yields. No recession in sight. Ask any business their number one problem is not enough labor particularly skilled.
I don’t really think an extra $150 billion in taxes is going to affect demand. Even if it does it will be worth the minor pain now. China is a malevolent force whose objective is to become the worlds dominant military and economic power. They have murdered over 50 million of their own citizens. To allow them to engage in nepharious trade practices will only hasten our demise. Also, according to Barron’s it is still profitable to currency hedge when buying long bonds.
But those tax increases are hitting an already overstretched and underwater consumer, with consumer debt in credit card balances, student loans, and auto loans especially at dizzying heights. The affluent can afford to buy and not much look at price tags, people like me can’t do that, I am putting off major purchases, I need a new TV but will not buy and ditto am using a laundromat rather than buying a washer dryer set (which has almost doubled in the last few years) because I am unwilling to go into debt for them. I also am renting rather than buying a house and will not even consider buying as long as the prices are so astronomical. Even though this means at my age I very probably will never be able to afford to buy, and rents are up 90% since about 2013/14.
I think what is driving interest rates is credit is like anything else, quality and quantity, there is so much debt out there that the price has dropped, and the globe for better or worse sees the US dollar (treasury paper) as safety, that is driving the dollar higher and an influx of cash to our markets. Personally I believe now that Brexit is a heartbeat away from fact and it appears to be a no deal Brexit at that, the real moneyed players are thinking that the EU is no longer tenable, Brexit will drop a house on the ECB and others will vote to leave when they see Britain surviving. Unstable coalitions like Italy, and possibly France, at least when France sheds it’s illusion that it is a co ruler of the EU with the ECB/Germany.
If there was actually a labor shortage there would be a lot of upward pressure on pay, which there is not. Basic economics.
The wage numbers are not reflected in the fake propaganda numbers the financial politburo publishes, just like CPI. Ask any business owner, their number one problem is labor shortages. Wages are going up particularly for skilled trades. I see help wanted signs everywhere. I speak to business owners and they cannot get anyone who wants to work.
If the #1 problem is not enough labor isn’t that a concern. How do you grow if you can not find workers?
You have to have legal immigrants fill both of these categories. There is wage inflation as a result however the propaganda fake CPI numbers will never reflect this. As a result the middle class is losing purchasing power hence the rush to socialism.
I agree which is why so many are financially stressed, their compensation has not kept up with inflation. They are trying to maintain their living standards on plastic. As a share of national income labor has been in steady decline for a long time. I know that my pay has risen 8.6% in ten years, my outgoes though have gone up at least, 40% with an significant reduction in my standards of living. And, next year may well be the year I have to live in my car, we will see what this year’s rent increase is at the end of the year. I simply have no more that I can cut from my monthly spending to give to the landlord.
The theory is that inverted yield curves do cause recessions because banks borrow short term and lend long term. If they can’t do that profitably they then stop lending, credit stops expanding, and the economy shrinks.
The problem with economic theories is they rarely are true in the real world of finance and economics.
How can you say “the problem with economic theories is they rarely are true in the real world of finance and economics” in a world with negative interest rates!! The problem is that we have idiots running our governments who will pull any available lever that they have over the economy in order to keep themselves in power, even if it ultimately destroys that very same economy. Keynesian economics was only intended to minimize business cycles, not to eliminate them!
Every bank sets their own deposit and lending rates. My bank has 2% 1 year CDs. Others have <1%.
This business will get out of control. It will get out of control and we’ll be lucky to live through it.
Admiral Josh Painter