Thursday, May 28, 2009

Slope of yield curve and growth

With all the hoopla about rising Treasury yields, it is worth remembering that the slope of the yield curve has been a pretty good predictor of future real growth.  Click on graph for larger image.


Growth might accelerate into 2011 and then level off or decline.  If “inflation” of the traditional wage-price variety accelerates, while not likely given the state of the labor market, that would pose a danger in that the Fed would presumably have to tighten to control it.  (The Fed doesn’t tighten to control asset inflations.)  The current steepening of the yield curve is entirely consistent with our last “animal spirits” update forecast of “no recession [in the NBER sense] in sight”; the next update comes in June after the May unemployment release.  Real growth will accelerate to maybe 2 percent.

The higher yields at the long end and increasing risk aversion among foreign debt buyers (but not the Fed!) should push Treasury sales further into the short end, so short run, Treasury wins, perhaps.  But if there are indications of accelerating inflation at all, a classical rush to the short end and inversion of the yield curve might presage Obama becoming a one-term president.  Hence, it is in the Democrats’ interest, regardless of their rhetoric, to keep the labor market down.  The President’s continuing appeasement of the ruling class would seem to guarantee this; he hasn’t breathed a word about doing away with George Bush’s tax cuts for the rich in ages (see this for my take on the big picture, if you haven’t already).  So much for shared sacrifice.

At some point either the labor market will kick back and inflation happen, or the economy will implode again as bad debts transferred onto the taxpayers’ tab cause demand to fail—the dollar will collapse—and foreign investors will demand even higher rates.  If the current social contract remains in place, this will be the coup de grace for the American middle class—there won’t be one anymore.  There will be a rich elite (the top ten percent of Americans now take half of all national income) and a captive working class, still better off than the poor in the less developed countries, but without access to the educational opportunities and social connections required to jump to the upper class except in rare instances.  The rich will grumble about paying the lion’s share of taxes, as they do now, while taking a pig’s share of all income.

Hence, we stick to our adherence to the Strauss and Howe hypothesis of a renegotiation of the American social contract culminating in a massive crisis over the next dozen years or so (see this and this).

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