Fixed Securities and Interest Rates

[chinaco]

It seems that the White House updated its jobs projection.

They are not expecting to get close to full employment till 2017 (projection of 6% unemployment).

That is a long-term outlook and of course things can always change.

White House: Slower jobs recovery ahead - Sep. 1, 2011


2017 would be about 10 years after the meltdown. The average business cycle is about 4.5 years. We had a couple of cycles that lasted just over 9 years (2 times out of 33 cycles). Since WWII business cycle average has been about 5.x years the two 9 year cycles were in that time period (2 times out of 11).

http://www.nber.org/cycles.html

If the white house projection is correct (6% in 2017), we could go through another recession before the unemployment situation get back to full employment. The reason I point this out is the Fed's common response to a contraction is to move rates lower. Of course, I am not sure they could get much lower... but rate could stay low.

The fed made a statement the other day about keeping rates low till 2013.

Given the unemployment projection, do you think the Fed might keep rates low for up to 5 years? I suppose if inflation rises they may raise rates to combat inflation.

What do you think about this situation?

There is has been a lot of discussion about fixed investments lately.... but the economic outlook seems to keep changing.

Thoughts or comments?

 

[wolf]

It seems that the White House updated its jobs projection.

They are not expecting to get close to full employment till 2017 (projection of 6% unemployment).

That is a long-term outlook and of course things can always change.

White House: Slower jobs recovery ahead - Sep. 1, 2011


2017 would be about 10 years after the meltdown. The average business cycle is about 4.5 years. We had a couple of cycles that lasted just over 9 years (2 times out of 33 cycles). Since WWII business cycle average has been about 5.x years the two 9 year cycles were in that time period (2 times out of 11).

http://www.nber.org/cycles.html

If the white house projection is correct (6% in 2017), we could go through another recession before the unemployment situation get back to full employment. The reason I point this out is the Fed's common response to a contraction is to move rates lower. Of course, I am not sure they could get much lower... but rate could stay low.

The fed made a statement the other day about keeping rates low till 2013.

Given the unemployment projection, do you think the Fed might keep rates low for up to 5 years? I suppose if inflation rises they may raise rates to combat inflation.

What do you think about this situation?

There is has been a lot of discussion about fixed investments lately.... but the economic outlook seems to keep changing.

Thoughts or comments?

Seems everyone is making their best guess. No one knows. One thing I and a few others have posted. Look at Japan. At one time, they were going great, buying overseas. Then Japan's Real Estate bubble burst, their stock
market crashed. The Japanese Gov't, lowered interest rates to "zero", in a effort to stimulate the economy. I think they are going on 10+ years, with super low interest rates.

Picture is very similar to the U.S. economy. "Experts" say the U.S. situation is different. And our policies will fix the economy. 2008 market crashed. So far
we are still sinking....

If you have time, read about the Japan bubble.....and compare it to the US
bubble....

 

[chinaco]

Looks like that last time a 10 yr govt bond yielded in the 3% range was 1996.

Here is their 10 yr bond yield history.


Japan Government Bond 10 Year Yield

 

[Col. Klink]

Good analogy with Japan. I think the Fed has no choice but to keep interest rates low. Companies continue to invest abroad where there are fewer federal regulations governing how a company has to conduct its affairs.

 

[jebmke]

This could go on for a very long time. Financial crises tend to have a longer impact than "regular" recessions.

I was amused by the following quote in the NYT today [my emphasis].

The “frustrated optimists” describe a country whose people are falling behind, a political system increasingly paralyzed and institutions that seem ever more inadequate to meet ever more intractable challenges. They remark that China led the world until it bumped into a series of “bad centuries” after 1644.

 

[M Paquette]

Seems everyone is making their best guess. No one knows. One thing I and a few others have posted. Look at Japan. At one time, they were going great, buying overseas. Then Japan's Real Estate bubble burst, their stock
market crashed. The Japanese Gov't, lowered interest rates to "zero", in a effort to stimulate the economy. I think they are going on 10+ years, with super low interest rates.

Picture is very similar to the U.S. economy. "Experts" say the U.S. situation is different. And our policies will fix the economy. 2008 market crashed. So far
we are still sinking....

If you have time, read about the Japan bubble.....and compare it to the US
bubble....

Both are "balance sheet recessions," or the dreaded credit crunch. In both cases, regulations on the financial industry were relaxed, a variety of banking investments formerly prohibited were allowed, including very aggressive lending in the property markets. Bank lending was done on the basis of collateral (rising real estate prices) rather than on cash flow, and the loans were then traded through novel mechanisms. The US securitized mortgages into instruments such as the collateralized debt obligations (CDOs), and in Japan, a good bit of debt was repackaged as share classes and cross-loaned between the six big keiretsus and large corporations.

There are some differences. In Japan, interest rates were kept fairly high (4%) heading into their recession in 1992, and there was even more reluctance to address non-performing loans than in the current US slowdown, leaving bank lending paralyzed and extending the credit crunch.

US banks were relatively quick to recognize some losses and raise capital, although current performance indicates that they might not have done enough yet. US interest rate policy was suffering from a hangover from holding rates too low coming out of the 2001 recession, which in turn contributed (along with permitting investment banking activities such as securities creation to be combined with traditional banking activity such as mortgage writing) to the final big spike of our housing bubble.

 

[M Paquette]

This could go on for a very long time. Financial crises tend to have a longer impact than "regular" recessions.

Yup. Non-political economists (the ones you never hear about, and who don't get invited in TV) don't see GDP growth getting up to the 3.5-4% range until late 2015 to 2016, and unemployment remaining above 6% until 2016. Those are consensus numbers. The 'Blue Chip' numbers (August 2011 Blue Chip Consensus Forecast extended with March 2011 Blue Chip long-run survey of 50 private sector forecasts) has real GDP chugging along at around 2.6-3.1% til 2021 (it doesn't go past that...), and unemployment over 6% til 2017.

Most of this is due simply to the impact of the balance sheet recession and the sheer amount of time it takes to pay consumer and commercial debt back down from the highs of 2007 (300% of GDP) to the longer term level around 50% of GDP. Various proposed federal fiscal policies and programs move the GDP growth number up or down by about 0.4% and unemployment number by about 1%.