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Thursday, March 27, 2008

Guess what folks? Economists don't know what's going on, either.

I posted a question with the subject line, "Is the Fed inflating or not?" to a Listserv of professional economists. After about 30 replies, I still don't know what the answer is.

Here is a plausible argument stating that in today's environment, Treasuries are actually safer investments than "cash" at the bank. (HT2 Pepe.) Soon the nominal yield on short-term Treasuries may be negative; institutions might actually give the government $1000 in cash today, in exchange for a promise of $995 (say) in three months. Why? Because if they keep it in the bank earning a better zero rate of interest, they could lose it when the bank collapses.

Man oh man.

9 comments:

  1. Anonymous8:45 AM

    I think you left out a 'than.'

    ReplyDelete
  2. Anonymous11:53 AM

    Many people who argue the Fed is tight cite the St. Louis Fed's chart on M1 growth which is flat.

    Perhaps this is a dumb question, but after 94 years of dollar depreciation, how do we know they are not lying about the M1 numbers?

    ReplyDelete
  3. First anon: Where is it missing?

    Second anon: Well, I guess they could outright lie, but I think they instead do stuff like change definitions (from CPI to "core" CPI) and stop reporting inconvenient figures, like M3.

    ReplyDelete
  4. Anonymous12:26 PM

    "Because if they keep it in the bank earning a better zero rate of interest..."

    ReplyDelete
  5. anon: That's what I meant. It is a zero rate of interest, and that's better than negative.

    The point is that people would rather hold Treasurys than cash in the bank, even if the yield on Treasurys is negative.

    I probably should have written "(better) zero" to be clearer.

    ReplyDelete
  6. Bob and anon, I think you'll like this recent Buttonwoods column:
    http://www.economist.com/finance/displaystory.cfm?story_id=10881361

    "The Swiss franc certainly did well in the 1970s, an era that strategists are frequently citing as the model for recent events. At one point, the Swiss were even able to charge investors for the privilege of holding accounts in their currency—a rare instance of negative interest rates."

    ReplyDelete
  7. I never know if I can trust any of the economic data I receive. I think the proverbial shit started hitting the fan last July when Bear Stearns started having trouble.

    I know anecdotally, from working from my house, that there are are a lot of men who would normally be productively employed, hanging around their houses all day in my semi-elite neighborhood. I know what the market looks like from being an appraiser. I know that I can get through Home Depot on a Sunday Afternoon with a minimum of friction.

    Things are seriously fucked up. I think the wheels fell off in July 2007. I don't think the business of remodeling kitchens is going to come back until easy credit comes back. I think all the job growth in the past decade has been related to home improvement and new home construction.

    I don't think inflation has too far to run, because the bucks just aren't there to chase it.

    ReplyDelete
  8. Tim,

    An interesting article. I especially liked the guy named Knight Frank. I wonder if he's friends with Friedman Milton.

    ReplyDelete
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    ReplyDelete