Sam Po — GUNDLACH: The Consensus Is Wrong — Interest Rates Could Sink To Levels We Haven't Seen In Decades

Deflation.

Cluster stock
GUNDLACH: The Consensus Is Wrong — Interest Rates Could Sink To Levels We Haven't Seen In Decades

Sam Po

Cameron K. Murray — Krugman vs Bank of England (or QE bails out the rich)

Here’s how the Bank of England summarises the effects on wealth from quantitative easing. 

"By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets."

Which is the exact opposite of Krugman’s point, since he overlooks the prices of assets altogether. And now the BoE’s take on how QE and low interest rates have affected bond holders. 

"By pushing down gilt yields, QE has reduced the annuity rate. But the flipside of that fall in yields has been a rise in the price of both bonds and equities held in those pension pots. Another way of explaining this is that the income flows from a pension pot (dividends in the case of equities and coupons in the case of bonds) will not be reduced by QE. Indeed, if the pension pot contains equities, then the flows could even be higher as a result of increased dividend payments from the boost to the wider economy from QE." 

There you have it. Low interest rates and asset purchases bail out the rich. I hope Krugman reads this and thinks more carefully, because he has a very wide influence in the public debate about these issues.

Fresh Economic Thinking
Krugman vs Bank of England (or QE bails out the rich)
Cameron K. Murray

JW Mason — Liquidity Preference and Solidity Preference in the 19th Century

On the history of interest rates in the 19th century US. Turns out that the natural rate of interest is not natural.

The Slack Wire
Liquidity Preference and Solidity Preference in the 19th Century
JW Mason

Matias Vernengo — Krugman is right: "Macroeconomics is all wrong"

Excellent takedown of Paul Krugman along with conventional macro, in just a couple of paragraphs.

Naked Keynesianism
Krugman is right: "Macroeconomics is all wrong"
Matias Vernengo | Associate Professor of Economics, University of Utah

Edward Harrison — How bond market vigilantes force rates higher

Bottom line: the deficit is mostly an endogenous variable – the result of how existing fiscal policy interacts with private sector savings and consumption decisions. In economic parlance, the deficit is the result of an ex-post accounting identity, not an ex-ante economic variable to target for economic policy. The deficit automatically increases during an economic crisis, as it did after 2009 everywhere in the industrialized world. The deficit also automatically declines when private net savings declines, as it does when an economy recovers from a private sector debt crisis. That’s what’s happening now. In today’s circumstances, it is completely unrealistic to expect high levels of inflation that would force the central bank to raise policy rates. Right now, inflation and inflation expectations are actually decreasing, not just in the US but globally.

Credit Writedowns
How bond market vigilantes force rates higher
Edward Harrison

Gavyn Davies — Bond yields and disaster risk premia

Read it at The Financial Times |

Bond yields and disaster risk premia
by Gavyn Davies
(h/t apj in the comments)

Yep, and why safe currencies and gold are doing well too.

And when a lot of people are adopting a defensive portfolio strategy, and a lot of other people are saving and deleveraging, and this is happening across many countries, the likelihood of debt-deflation runs high owing to the paradox of thrift. When this is a situation affecting many key economies, the external cannot offset the domestic private retrenchment, and it is left up to governments. Should governments not step up sufficiently, then the situation will worsen and the result may become spiraling deflation. With a polarized political environment, the likelihood that governments will take appropriate action decline in proportion with the level of rigidity.

The US TIPS curve has become inverted — US becoming the next Japan?

One could argue that this is a positive development for the US consumer because it could mean price stability. However this move in TIPS certainly raises the risk of near-term deflation, driven by weak demand growth. Anddeflation is notoriously difficult to get under control. This feels (though only in the near term) a bit like Japan, a nation quite familiar with zero to negative inflation expectations.

Read it at Credit Writedown

The US TIPS curve has become inverted

by Sober Look

US becoming the next Japan?

"Who's gonna buy them now?"

Remember Bill Gross's infamous Tweet on June 30th when he wondered aloud who will buy Treasuries now that QE2 was ending.

Well despite the end of Quantitative Easing and a first-ever downgrade in the U.S. credit rating by a major ratings agency, the 10-year Treasury yield is now more tha ONE FULL PERCENT below the level where Bill Gross worried aloud publicly.

You'd think a guy who runs over $200 bln of bond money and who's dubbed, "The Bond King," would know something about bonds.