[was: Re: [PEN-L:11925] Re: Vaporware]
At 12:15 PM 5/22/01 -0400, you wrote:
>Michael Perelman wrote:
>
>>It may be that the rational expectations of the tax cut have
>>succeeded in eliminating the downturn.
Doug writes:
>Five Fed easings - and 75 central bank easings worldwide since December -
>probably had more to do with it.
In the preparation of a lecture, I was looking at the "yield curve" for 31
August 2000 vs. that for 21 May 2001 (easily done at
http://www.stockcharts.com/charts/YieldCurve.html). I noticed that even
though short-term interest rates have fallen sharply, the long-term rates
have not done so. Comparing 21 May to the end of December 2000, long-term
rates have risen.
What this might imply are the following:
(1) the Fed has moved the US away from the "inverted yield curve" situation
of August, so we are no longer in the situation where the players on the
market are predicting a monetary policy-driven recession. There was a
period in which people equated an inverted yield curve with a coming
recession, but that only works for monetary policy-driven ones (which
causes recession by hiking short rates relative to long rates). The theory
did work in the sense that the inverted yield curve was soon followed by a
sudden slow-down of the real economy (and the lingering possibility of an
"officially-defined recession").
(2) because of the way in which the yield curve has been getting steeper
(with falling short-term rates and stable long-term rates) since January,
it's possible that the US economy could be moving toward the kind of
situation seen in 1992, where lower short rates caused the yield curve to
get very steep (much steeper than now) without encouraging much in the way
of long-term cuts or a prompt revival of the real economy. (It's long rates
which are crucial to the real economy.) Greenspan wanted to help his friend
Bush (the Father) get reelected, but his efforts didn't take hold until it
was too late, so Clinton was able to take credit. If this works out,
Greenspan would be "pushing on a string." On the other hand, the
combination of rate cuts and promised tax-cuts for the big spenders might
prevent a recession.
(3) rising inflation might lower expected real interest rates, which would
stimulate spending and help avoid a recession.
(4) of course, if the US economy does a recession, that would encourage the
continued rise of the private-sector debt-load, so when a recession hits,
the consequences would be larger.
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
