- The Big Picture - http://www.ritholtz.com/blog -

“Its different this time.”

Posted By Barry Ritholtz On June 8, 2005 @ 7:32 am In Economy,Fixed Income/Interest Rates | Comments Disabled

Make no doubt about it — thats precisely what Alan Greenspan said about the "puzzling decline" in long-term rates.

In the past, a decrease in yield on the 30 year was a signal of upcoming economic weakness. The Fed Chair argued that "they aren’t as reliable a signal of such weakness as in the past."

You see, "its different this time."

But is it really? We looked at the 4 factors [1] impacting rates, and some things have changed: Most prominently, the incredibly dumb decision to stop issuing 30 year bonds. But the rest of the forces we see impacting bonds: global labor arbitrage with Asia exporting wage deflation, as well as the Asian purchases of Treasuries — are long standing factors.

So why believe that its "different this time?" The WSJ [2] suggests:

Since June 2004, the Fed has raised its short-term rate target to 3% from 1% and has signaled plans to raise it further, while the 10-year Treasury bond yield has fallen to less than 4% from 4.7%. That sort of decline in long-term rates "is clearly without recent precedent," Mr. Greenspan said via satellite to the International Monetary Conference, a meeting of bankers from around the world, in Beijing.

You know what else is clearly without recent precedent? A Fed trying to manage their way through a post-bubble environment by hyper stimulating growth [3] via ultra-low interest rates and increased money supply.

Why the Fed Chief has invoked 9/11 as the reason for putting the world awash in liquidity, he should consider the only thing different this time is him and the Federal Reserve.

The last comparable bubbles — 1929 in the U.S. and Japan in 1989  — didn’t see the massive liquidity inflows this Fed geenrated — nor the problems the "Free Lunch" ultimately creates.

I do not advocate a return to the Gold standard like Greenspan’s Objectivism hero (Ayn Rand) favors — but I have to admit that I see their point. This massive manipulation of the global economy by the U.S. Central Bank has the potential to be enormously disruptive.      

Conundrum? Hardly.


UPDATE JUNE 8, 2005 4:33PM
Great minds think alike — Northern Trust’ [4]s Daily Economic Commentrary was titled "Yield Curve Message – It’s Different This Time? [5]"

Here’s the accompanying graphic:

Interest Rate
Spread: 10-Year Treasury Bond Less Fed Funds Rate (3-month Moving Average)

% ISM Mfg: New Orders Index, 3-month MovingAverage SA, 50+
click for larger chart
Different_this_time [6]



Greenspan Casts Doubt on Import of Falling Rates [2]
THE WALL STREET JOURNAL, June 7, 2005; Page A2

Yield Curve Message – It’s Different This Time? [5]
Paul Kasriel, Asha Bangalore
Northern Trust, June 08, 2005

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/06/its-different-this-time/

URLs in this post:

[1] 4 factors: http://bigpicture.typepad.com/comments/2005/05/conundrum_revis.html

[2] WSJ: http://online.wsj.com/article/0,,SB111810654326352488,00.html

[3] hyper stimulating growth: http://bigpicture.typepad.com/comments/2005/05/housing_employm.html

[4] Northern Trust’: http://www.northerntrust.com/

[5] Yield Curve Message – It’s Different This Time?: http://www.northerntrust.com/library/econ_research/daily/us/dd060805.pdf

[6] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/different_this_time.jpg

Copyright © 2008 The Big Picture. All rights reserved.