Reply #7: That's right. The connection between inverted yield curves and

[leveymg]

liquidity trap was discussed: http://www.dailykos.com/comments/2007/9/7/84434/35396/82#c82

Tell me if I'm wrong, but an inverted (3+ / 0-)
curve indicates that the Fed has essentially run out of room to continue dropping rates as a stimulus without risking inflation?.

Is the "conundrum" you described above the same thing that happened in Japan following the blowout of its real estate and equities markets in the 1990s? There was little or no growth despite negative real interest rates. The only thing that kept the Japanese economy going was the dominance of a few Tokyo-listed global corporations in a couple key export sectors, cars and consumer electronics.

Looks like we're headed in the same or worse direction as Japan, and the UK before it -- flat growth, a declining dominance of global financial markets, a hollowing out of the corporate sector, huge debt burdens, and a real threat to the Dollar as the world's reserve currency.

by leveymg on Fri Sep 07, 2007 at 07:26:12 AM PDT

<[br />
inverted yield curves/Japan
As to inverted yield curves: if the US were running surpluses as it was 50 years ago, the Fed could cut rates from 5.25% back down to 1% if necessary with no problem. Because of huge trade and budget deficits, however, every day we go hat in hand to foreigners to please buy our bonds. If the Fed tries to ignite another financial boom, those foreigners might think our money is a little less than rock solid -- so they may insist on being paid higher interest rates to hold especially longer-dated paper. That's the conundrum

On Japan, I haven't had the time to educate myself yet on that, although I understand that interest rates and inflation were already low before their long recession began. It is one point where I seriously diverge from bonddad. He thinks low rates mean no problem, I say US consumers continue to need ever lower rates in order to refinance debt, hence, problem.

Cheers.

"When the going gets tough, the tough get 'too big to fail'."

by New Deal democrat on Fri Sep 07, 2007 at 08:28:10 AM PDT

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Looks like Euro moneymarkets are becoming a
viable, liquid and low-risk alternative to T-bills, anyway, so it's only a matter of time until long-term rates have to go up, and inflation with it.

The effect of a sell-off of Dollars is sure to act as a multiplier of that inflationary effect, so it really doesn't matter if the Fed determines to hold the line on inflation - it can't, anymore.

by leveymg on Fri Sep 07, 2007 at 09:22:52 AM PDT

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