Remember when our Bond Rating was Downgraded?

[cthulu2016]

Aug 5, 2011. What a dark day that was for us all.

The day our credit was down-graded and the interest we have to pay on our debt sky-rocketed.

You can plainly see the devastation of that downgrade on this chart. Oh... wait. Actually you cannot because the value of US treasuries (which is inverse to yield--the interest paid) has only gone up since the downgrade. (Yields going down)



In fact, our bonds have never yielded less. Never. Since the end of this chart a month ago they have coninued down and our 10-year treasury is currently paying a whopping 1.75% interest.

I swear... if the Republicans actually believe in all this inflation they claim that Obama is sure to create then shouldn't we be running up the debt like crazy? Being able to borrow trillions at 1.75% in the inflationary environment they claim is always right around the corner would be one of the biggest money-making deals in financial history!

[exboyfil]

1. You do understand a large part of the distortion

is the Fed buying U.S. government debt. I agree the downgrade was meaningless because the rating agencies already proved themselves to be useless by their own admission. I will never trust a rating agency again, and they might as well go out of business as far as I am concerned so long as we have strict enforcement of filing and notification laws for bond issuers.

[abelenkpe]

3. And investors fleeing Europe.

Sovereign currency wins.

[cthulu2016]

4. Is quantitative easing really all that effective?

Sure, QE probably doesn't hurt but isn't it fairer to say that his is just what highest quality 10-year paper is worth?

The US, UK and Japanese 10-year treasury notes are all paying around 1.8% so ad hoc explanations of US bond behavior are not needed. The bonds of stable nations with large economies and sovereign currencies are extraordinarily low, and global expectations of growth and inflation are extraordinarily low.

The Fed would probably be better served buying different assets because there's probably no way to push bonds much below inflation expectations, and there was no dramatic rate increase when QE1 ended.

I could be wrong, but 1.75% looks like pretty fair value to me.

[unblock]

8. the downgrades were meaningless because the rating agencies don't know any more about treasuries

than the rest of the investing world does. the market for u.s. treasuries is the most liquid market on the planet, and there's simply nothing that the rating agencies bring to the table when the deign to opine on treasuries.

it's a different matter when they rate small companies and such, where they actually DO know more than the investors could possibly figure out on their own.

moreover, saying that u.s. treasuries are less than ideal doesn't mean that alternatives (most countries in europe, e.g.) any better. besides, leichtenstein and monaco only care to borrow so much with their AAA ratings.


as far as the government buying up the debt, the government is actually not really that powerful. they rely on their ability to crush speculators in the short-term to intimidate the market into doing what they want, but they actually can't overcome strong long-term trends. mostly they just try to smooth out the bumps while pretending to be in control of the situation.

[abelenkpe]

2. I recall lots of hysteria over

The dollar going down too.

They are still fixated on debt more than they should be.

[johnd83]

5. The real threat is actually deflation, not inflation

Inflation can only really catch hold if wages increase. Wages have in fact been decreasing. So there can't be any inflation. Cost of living can go up, but that is entirely different can of worms than inflation.

[cthulu2016]

6. Yes. I wish that was widely understood here and elsewhere

When a commodity goes up because there are more and richer customers demanding the commodity then were previously demanding it (or when the commodity is more scarce) that isn't inflation, it is just pricing.

As we know from the 1970s, commodity shocks can play a role in inflation, but not in a depressive environment like today.

No wage price spiral without wages.

As I am fond of saying, if milk has gone up 30 cents a gallon while your house has lost $50,000 in value and your labor (a commodity) is worth less than it used to be that isn't inflation. It just sucks if you need milk.

[johnd83]

7. Right now commodity and product prices are being held up by the emerging markets

Unfortunately the emerging markets are also hitting the same brick wall as their stimulus options run out, so the prices will being to drop. The result will be... deflation! We have put all of our "money" into gambling in stocks instead of the real economy, so the real economy can't do anything that creates actual wealth. It is really bizarre that the thing holding back the economy is a shortage fiat currency capital. Going back to the gold standard wouldn't help that at all, the "gold" value would just wind up in the finance gambling market the same way the fiat wealth did.