- 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  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  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  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.
Here’s the accompanying graphic:
Spread: 10-Year Treasury Bond Less Fed Funds Rate (3-month Moving Average)
Greenspan Casts Doubt on Import of Falling Rates 
THE WALL STREET JOURNAL, June 7, 2005; Page A2
Yield Curve Message – It’s Different This Time? 
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:
 4 factors: http://bigpicture.typepad.com/comments/2005/05/conundrum_revis.html
 WSJ: http://online.wsj.com/article/0,,SB111810654326352488,00.html
 hyper stimulating growth: http://bigpicture.typepad.com/comments/2005/05/housing_employm.html
 Northern Trust’: http://www.northerntrust.com/
 Yield Curve Message – It’s Different This Time?: http://www.northerntrust.com/library/econ_research/daily/us/dd060805.pdf
 Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/different_this_time.jpg
Copyright © 2008 The Big Picture. All rights reserved.