Reader Steven Kopits writes about the economics profession:
We now have three presentations by headline economists — Ken Rogoff, John Williams and Jim Hamilton — that are noting declining yields without so much as a peep about the underlying causes.
Not one word about demographics in any of these presentations. Williams (in the previous post) notes that short term rates have fallen from about 4.5% to 2% without so much as a hint as to why this might be happening. And then he assures us that , notwithstanding this development, the Fed has plenty of firepower to handle the next recession, even though short rates are around 2% and the Fed normally cuts rates by 4-5% in a recession. WIlliams claims that another round of QE would do the trick (again, this is simply a bizarre assertion wrt the customary monetary policy toolkit in the pre-2007 economy) when in fact Jim’s analysis (see his comment, previous post) suggests that QE was associated with rising, not falling rates. We can therefore conclude that the does not have a full spectrum toolkit right now, if recessions are to be considered in the same light as they were pre-2007.
I have the same impression watching and reading these presentations as I do shopping at our local Stop ‘n Shop. The background music is all familiar, the greatest hits of the 1970s and 1980s. I know them all, they bring back great memories and I sing along with the lyrics. And this happens in store after store that I visit. And my kids, now in college, know all these songs — they are part of their standard canon. But I keep asking myself: Where are the songs of this generation? Where are their voices? Why are we still listening to songs from two generations ago?
I have the exact same reaction to these economics presentations. Truly, they are the greatest hits. Wonderful insights, great people, I can sing along with the graphs. But where are the modern interpretations? How can Williams say, oh rates have fallen from 4.5% to 2% and leave it at that? How can Jim say the term premium is negative because now people fear deflation more than inflation and leave it at that? Why? Why do people fear deflation? What has changed? Are we still in the Great Recession (the China Depression)? Unemployment just hit a 50 year low, so that doesn’t seem all that probable, does it? So what’s different? We need to hear some new songs, if not from new artists, at least from the superstars of our youth.
As pointed out by an expert source, on page 61 of the CBO’s Long-term Budget Outlook (LTBO):
To avoid using any of those possibly less representative periods, CBO considered average interest rates and their determinants over the 1990–2007 period and then judged how different those determinants might be over the long term. That period was chosen for comparison because it featured fairly stable expectations of inflation and no severe economic downturns or significant financial crises.
Some factors reduce interest rates; others increase them. In CBO’s estimates for the 2019–2049 period, several factors tend to reduce interest rates on government securities relative to their 1990–2007 average:
- The labor force is projected to grow much more slowly than it did from 1990 to 2007. That slower growth in the number of workers would tend to increase the amount of capital per worker in the long term, reducing the return on capital and therefore also reducing the return on government bonds and other investments.24
Footnote 24 reads:
For more information about the relationship between the growth of the labor force and interest rates, see Congressional Budget Office, How Slower Growth in the Labor Force Could Affect the Return on Capital (October 2009) (link fixed).
See also my post here.
I am constantly amazed by how the ill-informed project their own ignorance onto others.