interest rates

Economic Indicators during the Roaring Twenties and Great Depression (II).

Yesterday I discussed the need, given our deflationary recession, to examine the reliability of economic indicators during past periods of deflation, specifically to the period from 1920 to 1950. Today I begin that examination with the 1920s.

II. The Roaring Twenties: monetary indicators

The Roaring Twenties was an era of productivity- and debt- fueled urban prosperity that contemporaries called "The New Era" in which supposedly all of humanity's economic problems had been solved. Little did people at the time know of the severe hardships that awaited them when the bubble burst. Monetarily the decade was begun with the bursting of World War 1's high inflation (much like Paul Volker was to burst 1970s' inflation 60 years later), that settled into disinflation (declining inflation) and finally into deflation.

Today I will examine the monetary component of Paul Kasriel's "infallible recession indicator" as applied to the 1920s.

Economic Indicators during the Roaring Twenties and Great Depression (I).

I. Introduction

The supporting data normally cited in the welter of economic commentary suffers from an important limitation. Almost all of those indicators date from the 1950s and 1960s onward. That is to say, they cover a period where there was not even one single deflationary event. All of their reliability comes from a period of waxing and waning inflation -- but always inflation. As we are experiencing the most significant deflationary recession since the Great Contraction of 1929-32 and the Post World War 1 deflation of 1920-21, the applicability of these indicators is very suspect.

This point was driven home to me when I saw a graph of one such very reliable post-war indicator -- the yield curve -- dating from 1929. The graph re-posted below, shows a relentlessly positive yield curve (short term rates are in green, long term rates in red).

If one were ignorant of history, one would have expected that with the exception of a couple of brief bumps, the economy would have been expanding nicely throughout the entire period from 1929-1950! Even during most of the "great contraction" of 1929-32, the yield curve was positive.

He was shocked, I tell you, shocked!

Man oh man, if there ever was a prime example of a revelation of the greatest flaw in libertarian economic theory, it had to be Alan Greenspan's speech.  For those not in the know, the former Federal Reserve Chairman spoke before a Congressional committee yesterday.  Long one of the grand proponents of laissez fair capitalism, his decisions, ironically, probably has lead to the complete discrediting of such economics. 


"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief," said Greenspan, who stepped down from the Fed in 2006.

- excerpt from Greenspan: I was Partially Wrong on Credit Crisis,, 2008.

Why something should be done

I'll be honest, I never wanted to write up a diary piece like this. A week ago, like many of you, my feelings on "bailing out" Wall Street was equally negative. Why? Why in the name of all that is decent should we clear up the bad judgment of folks who really do not care about the common folk?

For years, folks who would be identified as the type who would get the jobs of running organizations like Goldman Sachs or Lehman Brothers, were considered "Masters of the Universe." For them, we, you and I, were the dirty lowers against their kind. We existed to supplement their income. But now the veil has been lifted, and we see now that they are not masters of anything but their own greed and stupidity.

Bankruptcy 2015 ? (Part II.)

In Part I of this series, I examined the 1992 best seller entitled "Bankruptcy 1995", which had predicted that the US would become unable to service its national debt as early as 1995 due to soaring budget deficits. So dire and well-documented was the warning that it affected the outcome of the 1992 presidential election, helping to elect Bill Clinton. In light of new looting of the national treasury by George W. Bush and the Republican Congress, I re-read the book to see if any of its predictions were now coming true. I posted those predictions, and the book's thesis that continued budget deficits would drive up interest rates and lead to "Death by Hyperinflation" or "Death by Panic" in Part I.
But "Bankruptcy 1995" obviously didn't happen, in spite of the fact that deficits have continued to be run nearly every year since then. Only part of the reason was the fiscally responsible Clinton tax and budget plan that began in 1993. In this diary I examine how a long-term, continuous decline in interest rates has actually reduced the carrying costs of the National Debt, and why that means the sky Hasn't fallen -- yet.

Surprise! Negative interest rates don't always mean high inflation

In the last couple a days a lengthy brief by Aaron Krowne, famous for the "Mortgage Broker Implode-O-Meter", titled Debate Over: It's Hyperinflation (and US Economic Collapse) has gotten extensive attention. The title is pretty self-explanatory. Krowne claims that the Fed's recent negative interest rate policy is going to provoke hyperinflation:

the one thing that is different this time; the only thing on the planet that could truly be the cause of the EXTREME price action in oil, are the actions of the Fed. In specific I mean holding interest rates at the ungodly low rate of 2% -- below even their own doctored inflation reading (which is around 4%); and hell, below even their core inflation reading, which is a percent lower or so.

Why the Economy may favor McCAIN on election day!

If you are open minded enough to consider evidence that runs contrary to received wisdom and challenges your assumptions, read on, I hope you will find this thought-provoking.

Because there is some excellent evidence that, if "It's the Economy, Stupid", then there are some very powerful people who have operated some very powerful economic levers to the benefit of one certain Senator John McCain. And the cocaine they are injecting into the economy is going to hit full force by about election day.

Those very powerful people are the Open Market Committee of the Federal Reserve Bank, including Fed Chairman Ben Bernancke.

Will the Recession be Over by Election Day?

The economy is always a yin and yang, with one thing tending to counterbalance another. In the past I have frequently differentiated one such tension between the "Kudlow economy" for the top 20% (actually more like top 5%) which prospered mightily during the Bush/GOP malAdministration, and the "Bonddad economy" of the bottom 80%, which saw little or nothing of the alleged prosperity.
Until late last year, consumption in the Kudlow economy more than balanced the distress in the Bonddad economy. Then, the balance changed.
I am here to deliver a message which I fear will be as welcome as a skunk at a wedding reception: I believe the balance is about to change again, at least briefly, back in favor of the Kudlow economy. Even if you disagree strongly, I hope you take the time to consider the evidence I amass below.

1946! Interest rates, inflation, and war

I'm not a trader, and I don't put much faith in short term charts the likes of which you typically see in financial porn. Longer term charts, however, are more interesting. It is much easier to separate the signal (or trend) from the noise, and the "trend" is a reflection of the economic psychology of the public. Not just that part of the public that invests, but the public who buys houses and has mortgages, buys cars and retail and pays on credit, or even saves in CDs and money market accounts. In short, just about everybody.