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The real interest rate on 5-year inflation-protected securities is now negative.

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Kurt_and_Hunter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 01:07 PM
Original message
The real interest rate on 5-year inflation-protected securities is now negative.


Look at the lower left-hand corner: the real interest rate on 5-year inflation-protected securities is now negative. In other words, prospects for other investments are so poor that some investors prefer a safe asset that doesnt quite keep up with inflation.

Yet to maintain employment, we need to sustain spending, one way or another. One way is to have the government take advantage of its low financing costs to spend on useful things; but the deficit peacocks in Congress are blocking that solution. Another is to get real interest rates low enough to get the private sector spending; but that, as we can see, means that the real interest rate on medium-term government debt has to be negative.

The only way you can do that is by having the Fed credibly promise to deliver significant inflation.

http://krugman.blogs.nytimes.com/2010/08/11/why-we-need... /

Oh, and the invisible bond vigilantes continue their invisible attack: nominal 10-year bonds at 2.71%. ...As it happens, interest rates are also now lower than they were when the big debate over fiscal policy and its interest-rate effects began. For those who dont remember or dont know, this started with the claim that government borrowing would send rates soaring, crowding out private investment, and that this would abort the recovery. I tried at the time to point out that this reflected a failure to understand basic macroeconomics; but as usual, made no headway with the culprits.

http://krugman.blogs.nytimes.com/2010/08/11/the-meaning... /
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Kurt_and_Hunter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 01:55 PM
Response to Original message
1. 10 recs no replies = justified vanity kick
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Coyote_Bandit Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 02:28 PM
Response to Original message
2. ???
"....prospects for other investments are so poor that some investors prefer a safe asset that doesnt quite keep up with inflation."


As far as I'm concerned this is nothing more than confirmation that there are far better financial opportunities elesewhere - and there ain't a whole hell of a lot in the US worthy of investing in.

The ultimate end of gloabalization is a single worldwide standard of living. That means richer countries will become poorer while poorer nations prosper.

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Kurt_and_Hunter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 03:30 PM
Response to Reply #2
3. Bond markets are international
Edited on Wed Aug-11-10 03:31 PM by Kurt_and_Hunter
When securities are paying such super-low rates it means somebody is buying them. If nobody wanted them the rate would have to go up to attract buyers.

And anyone can buy bonds from anywhere these days. (The Chinese are famous for buying ours, for instance.)

So if there were opportunities elsewhere folks would go buy those.

Things are actually terrible pretty much everywhere right now. Look how screwed we are, yet we are still the most desirable bond issuer on Earth.
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Coyote_Bandit Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 04:56 PM
Response to Reply #3
7. Meanwhile African equity markets are performing quite well.
http://www.findajobinafrica.com/findajobinafrica/file_u...

There is a reason that nobody wants to buy US equities and bonds: the US economy as it presently exists (and has existed in recent history) is unsustainable and can reasonably be expected to further deteriorate. The US has an economy that is dependent upon consumer spending and services rather than real productivity. We have dumbfuck politicians that are too stupid or corrupt to enact the policies necessary to bring about meaningful economic change. And we have dumbshit citizens who don't begin to understand why price based purchase decisions are not in their interest and who value white collar wealth creation over the tangible productivity of an honest blue collar day's work.

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Kurt_and_Hunter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 05:34 PM
Response to Reply #7
13. "There is a reason that nobody wants to buy US equities and bonds"
Very incorrect statement.

US treasury auctions have done great throughout the crisis and foreign buyers are a big part of it.

The US stock market has done quite well.

(The dollar has done well also.)



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Coyote_Bandit Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 06:29 PM
Response to Reply #13
14. Ummmm......
I stand corrected. But that does explain the reason that investors who seek to maximize return don't particularly want to buy US equities and bonds. They can do better elsewhere.

Don't kid yourself US market exchanges are a poor reflection of the US economy. The securities traded have little to do with US companies utilizing US labor and resources producing goods and services which are marketed to US consumers. And those securities are freely available to those who ave only marginal contacts with the US.

Perhaps we should be asking why we do't have a market index that does provide a measure of the US economy.
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Kurt_and_Hunter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 06:39 PM
Response to Reply #14
15. You are correct that the US economy is a total mess
But the other western/1st world countries are as bad or worse.

I do not doubt that there are pockets of investment opportunity in the developing world, but a lot of times such "emerging market" opportunities are driven by things like currency issues.

Small nations can offer the potential for big gains and big losses. Ireland was the economic envy of the world ten years ago, economic basket-case today. Iceland is another one.

So my comments were no investment advice. I have no doubt there is money to be made in some emerging markets.

In the big picture, though, the little economies usually eventually take the hit when things are bad for the big economies.
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Yavin4 Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 05:11 PM
Response to Reply #2
8. "... poorer nations prosper" Uh, Correction
The wealthy and connected in the poorer nations will prosper. Not the people in the poorer nations.

Their "wealth" will be inflated away with undervalued currency which is really what globalization is all about.
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daleo Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 03:32 PM
Response to Original message
4. So this means fear of deflation?
If investors don't mind losing a bit, then they must think prices are going down a bit more.
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Kurt_and_Hunter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 03:33 PM
Response to Reply #4
5. There is a lot of that out there
Edited on Wed Aug-11-10 03:37 PM by Kurt_and_Hunter
In a literal sense, probably not for these inflation protected securities since their pay-out will go down if inflation falls even more.

But this kind of rabid flight to safety is part of the overall fear of further economic ruin and the general behavior of bond markets looks like a wide prediction of lower inflation.

And since we are under 2% already...

deflation isn't just a river in Egypt.
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Yavin4 Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 05:11 PM
Response to Reply #4
9. You Got It
We're Japan.
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Kurt_and_Hunter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 04:43 PM
Response to Original message
6. ...
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BzaDem Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 05:12 PM
Response to Original message
10. K & R.
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uponit7771 Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 05:17 PM
Response to Original message
11. Schiff claimed we're already in a hyper inflation environment propped by government spending and...
...if it wasn't for government spending prices would come down another 10-20%.

Deflation is the monster that can't be controlled inflation can be snuffed out somewhat correct?

TIA
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Kurt_and_Hunter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Aug-11-10 05:31 PM
Response to Reply #11
12. Pretty much (though you prolly meant deflation in the headline)
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