Treasury Market Acts Like the Economy is in a Death Spiral, But Wait…

This is a transcript of my podcast. You can listen to me on YouTube.

The US Treasury market acts like the economy is going into a death spiral, with the 10-year yield dropping to 2.14% on Friday. That’s below the one-month yield of 2.35%. So why would investors in the Treasury market accept a return on a 10-year investment that is almost guaranteed to remain below the rate of inflation over the 10 years, when they could buy shorter-term securities, such as one-month Treasury bills that offer a higher yield of around 2.35%?

In the past, the participants in the Treasury market have been terribly wrong about this. In these instances, the 10-year yield had no predictive quality. It was just a stupid move by the market, that then self-corrected brutally. The last such massive idiocy happened in 2016, and the good folks who made that move are still ruing the day.

Back in December 2015, when the Fed raised rates for the first time in the cycle, the 10-year Treasury yield was about 2.25%. But it was the time of the oil bust, and in the energy sector, junk rated credit was freezing up as some shale oil-and-gas drillers went bankrupt. So then in early 2016, the Fed indicated that it would pause further rate hikes. Sound familiar?

Starting in early January 2016, the 10-year yield began to drop. And on July 8, 2016, it fell to a historic all-time low of 1.37%. Even during QE, when the Fed was buying these securities, the 10-year yield had never dropped this low. It was just stupidly low. For the next 10 years, these buyers accepted to earn just 1.37% a year.

But then, yields started rising as bond prices fell. Four months later, by November, the 10-year yield had jumped by 100 basis points, from 1.37% in July to 2.37%. In December, it hit 2.6%. In five months, it had jumped 123 basis points. It had nearly doubled.

And then the Fed started raising rates in earnest. One rate hike in December 2016, three rate hikes in 2017, four rate hikes in 2018.

Investors who’d bought that 10-year yield in mid-2016, well, they’re still ruing the day. They can hold on to these things until they mature in 10 years with a return of 1.37% a year. Or they can sell them. If they sold these misbegotten 10-year maturities since then, they booked a sizable loss.

In other words, they’d bought at the historic top of the market. And that bet went bad in a hurry.

And this drop of the 10-year yield in early 2016 to a record low predicted that the economy would spiral down and that the Fed would start a negative interest rate policy. But there was no deflation, there was no economic collapse, there was not even a recession. The prediction by the Treasury market in early and mid-2016 was patently wrong.

This is just one glaring example. The predictions of the 10-year Treasury yield have a well-documented history of being wrong — and also of whipping its participants around and kicking them in the gut.

So now the 10-year yield has dropped to 2.14%; it’s predicting that the economy will spiral down: and it’s setting buyers up for another round of gut-kicking.

The economy is not spiraling down. The most important factor in the economy that accounts for 70% of GDP is the American consumer; and consumer spending is growing nicely. We just got the last batch of data from the Commerce Department on Friday.

The amount that consumers spent on goods and services in April, the Personal Consumption Expenditures, rose 4.3% compared to April last year, to a seasonally adjusted annual rate of $14.4 trillion.

This 4.3% increase was right in the range since the end of the Great Recession, not the hottest growth rate in the history of mankind, but pretty good.

Adjusted for inflation, the amount that consumers spent on goods and services rose 2.7% from April last year – which was also right in the range since the Great Recession.

So how are consumers getting this dough to spend?

In the same data trove, we learned that personal income rose 3.9% from a year ago to a record $18.1 trillion seasonally adjusted annual rate in April. Adjusted for inflation, real personal income rose 2.4% from April last year, right in line with the past few years.

And where does this growth in personal income and spending come from? Several factors:

  • Population growth (around 0.8% a year)
  • Job growth (around 1.8% over the past 12 months)
  • Wage growth.

Half of personal income comes from “wages and salaries”; the other half comes from other sources of income.

Income from “wages and salaries” rose 3.6% year-over-year to a record rate of $9.1 trillion.

The other half of personal income comes from diverse sources, including these biggies (dollar amounts are annual rates for April):

  • Interest income rose 1.6% year-over-year to $1.6 trillion
  • Dividend income rose 4.0% to $1.2 trillion.
  • Employer contributions to employee pension and insurance funds grew to a new record of $1.4 trillion.
  • Proprietors income of non-farm properties reached $1.6 trillion
  • Rental income grew to a record of $793 billion
  • Social Security benefits that were paid out exceeded $1 trillion.

And this is a lot of moolah going to consumers. Yes, it’s distributed very unequally. And this unequal income distribution, the gigantic and growing divide, is one of the biggest problems the American economy has. But consumers as one lump-sum figure are raking in the money.

So governments take their bite out of this income. What’s left over after the government gets its pound of flesh is so-called disposable income. This disposable income rose 3.8% in April compared to April last year, to a record $16 trillion annual rate.

After inflation, real disposable income rose 2.2%, and this is also in the middle of the range since the end of the Great Recession.

And consumers were even able to save 6.2% of disposable income. Spread out over the year, the increase in savings amounts to nearly $1 trillion.

So, there are more consumers, and they’re making more money, and they’re spending most of it, and this produces economic growth.

This has also shown up in consumer confidence surveys. For example, the University of Michigan consumer sentiment index for May rose to 100, which is near the very top of the range over the past two decades. It’s only during the years of the Dotcom Bubble that consumers were consistently more excited.

So that’s 70% of the economy. That part is showing decent growth.

Now on the government side: Spending by the federal government is soaring. In the first quarter, spending jumped nearly 6% from a year ago, to an annual rate of $4.6 trillion. This is a huge amount of money, and a huge growth rate. Most of what the government spends ends up in GDP directly or indirectly, sooner or later.

We can argue until our brains fall out whether or not this is what a government should do, and how it should fund this spending binge, but the mathematical result is that this federal spending binge boosts GDP.

So consumer spending is rising and federal government spending is surging.

Now on the business side:

Manufacturing is still growing in the US, but at a much slower growth rate. So there is a slowdown, and that slowdown is likely to get worse. The auto sector is particularly affected.

But manufacturing is a small part of the US economy. Its employment in the US is only 8.5% of private sector employment, down from 30% in 1955.

A big factor of what causes recessions is that people lose their jobs and then spend less. So consumer spending declines when unemployment surges. A decline in manufacturing employment is going to hurt, but these days, it is a relatively small factor.

The by far biggest employer is the service sector.

The two biggest segments in the US economy, each by multiples larger than manufacturing, are finance & insurance, and healthcare. Then there is the whole “information services” segment, such as telecom, data processing, etc. And then there are “professional services,” such as computer programmers, engineers, architects, etc. Those are the top four services segments.

Employment in these segments overall has been strong. And those workers are making a good amount of money, and they’re going to contribute to economic growth until they get laid off, and there are no signs of this happening yet.

So if manufacturing slows down hard, as it did in 2015 and 2016, and services slow down some, we might get one quarter of flat or slightly negative GDP growth. That’s still not a recession. Official recessions include are variety of factors, that last at least two quarters – two quarters of GDP decline, plus surging unemployment rates, a hit to consumer spending, and the like.

I’m convinced that someday, the US economy is going into a recession. Recessions are part of the business cycle. There is nothing abnormal about recessions. They’re a cleansing process that weeds out overindebted companies and gives the economy a fresh start.

But there are just no major signs of a recession yet. And the Fed has been pointing this out for months. It has been pointing this out in its meeting minutes. And a slew of Fed governors, including Fed chair Jerome Powell, have pointed this out in their speeches.

Even the biggest Fed “doves” have come out to say the economy is in a “good place,” and it would have to deteriorate and inflation would have to drop before it’s time to consider cutting rates.

Minneapolis Fed President Neel Kashkari did so on Friday. He is a super-dove. He said it’s too early to think about cutting rates. Low inflation and the escalating trade war “could be cause for changing the path of monetary policy,” he said. But he wasn’t “quite there yet,” he said. And he added, “I take a lot of comfort from the fact that the job market continues to be strong.”

And on Thursday, Trump’s man at the Fed, Vice Chair Richard Clarida said that the economy is, quote, “in a very good place,” and he said that the economic data would have to reveal a significant risk of a sharper slowdown than the slowdown the Fed already expects, before the Fed would consider cutting rates.

OK, this is not the fastest-growing economy in the history of mankind. Economic growth ebbs and flows. So there will be a period when growth slows from the hot pace last year. But this is not a rate-cut economy either.

And yet, Wall Street is clamoring for rate cuts – now it’s wanting three rate cuts this year. And it is betting on rate cuts – just like it did in early and mid-2016.

There is a reason why bond investors that hold bonds now want a rate cut: Bonds gain in value when yields fall. Big banks and other financial enterprises hold large amounts of Treasuries, and those Treasuries have dished out large amounts of paper losses in late 2017 and 2018 as longer-term yields were rising. So Wall Street is just talking its book when it’s clamoring for rate cuts.

This clamoring has zero predictive quality. It says nothing about what the economy will do next. It’s just a trick Wall Street performs to make more money at the moment. And in a world where nearly everything is overvalued, it’s hard to make money, and for Wall Street anything is fair game.

But there is a good chance that the 10-year Treasury yield will snap back, just like it did in 2016, and jump by a 100 basis points over the span of a few months. And then the wailing and gnashing of teeth by those who’d bought the rate-cut hype at the peak will be deafening. This is a transcript of my podcast on Sunday. You can listen to it on YouTube.

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  65 comments for “Treasury Market Acts Like the Economy is in a Death Spiral, But Wait…

  1. Iamafan says:

    There is a good article in NY Fed Liberty Street Economics regarding corporate debt. The shenanigans today is aimed to lower rates since non-financial corporations have about doubled their debt (aggregate) since the 2008 GFC mostly because of cheap debt. We’re addicted to debt. We can’t allow for rates to rise or we get a heart attack. So sad.

    • Ppp says:

      The flight from high yield debt into gold, bypassing Treasuries, says Treasuries will default.

      • Wolf Richter says:

        “…says Treasuries will default.”

        Treasuries cannot default unless Congresses chooses to not raise the debt ceiling and thus engineers a default. The Fed is the lender of last resort to the government, and the Fed has unlimited money-printing capabilities. This assures that the government can always sell more bonds, and thus will never run out of money, because there is always a buyer out there for this debt. And everyone knows this, even I do. And that acts as a guarantee.

        The thing you need to worry about is not a default by the government but loss of the purchasing power of the dollar, and an interest rate that is too low to compensate you for that loss of purchasing power.

        • By law, the US Treasury creates the Federal Reserve Notes, and then the Treasury provides them to the Federal Reserve Board of Governors. The Board then issues them to the Federal Reserve Agent from the district that made the request for the notes.

          See 12 USC Sections 411-419

          Eventually those same irredeemable notes are used to buy debt from the same entity that created them in the first place.

          So, yes, the Treasury will not have a problem creating more notes to issue to the Federal Reserve Board of Governors to buy Treasury debt.

        • Sinbad says:

          “because there is always a buyer out there for this debt. ”

          Until there isn’t.

    • akiddy111 says:

      Very good point. Glad you brought it up. Quite a few large Corporations are really blowing out their balance sheets.

      And some of these large companies are having a nearly impossible time growing revenues. Total debt/EBIDTA ratios are growing at a worrying pace.

      Look at Amazon. It added $75 billion to it’s liabilities in the last 5 years. It now has a balance sheet size to rival Walmart’s.

      Amazon will stop growing in a few years but it’s ever growing liabilities will still be there. But why bother future thinking these things ?

      • andy says:

        The worst balance sheet I’ve seen larely was Autodesk. Not clear how they’re managing to service that debt. Worse than Netflix or Tesla, I think.

        Anyone cares to opine on worst debt bubbles among large US Corps?

        Is there a quick way to determine debt overload?

        • Iamafan says:

          Get the multiple x Earning EBITDA to find how many years to pay debt with earnings before debt payments and capital expenditure. So many forms are now 6x and over. Meaning it will take at least six years to pay debt.

        • HowNow says:

          I don’t use them, but Moody’s & S&P are good sources for debt risk. Too bad they were asleep in 2006+.. or maybe just in bed with someone.

      • Ed says:

        akiddy – “Amazon will stop growing in a few years” is the funniest thing I’ve heard in awhile.

    • Mike says:

      What Wall Street wants Wall Street usually gets so expect rate cuts in the not too distant future. Trump is in that camp too.

      • Ed says:

        Mike – yes, and it’s interesting that 90% of Wolf articles are doom and gloom but in this article he is cheerleading for an economy that is clearly on it’s last legs.

    • Kasadour says:

      You are absolutely correct, it is very sad.

      If consumer spending were supporting this good but not great economy, and I don’t deny that, then why is POTUS publicly calling for the FED to a 100 basis point rate reduction on FED funds, and implementing even more QE? The answer is that if the benchmark rate nears ~3%+ again, debt becomes unserviceable, and in the words of the debt-King himself Elon Musk, and is soul crushing.

      Further to the point, i assume Mr Richter, when referencing the wealth imbalance, means real property valuation benefitting one percent of the “work force”, while the rest, due to affordability issues, must put off the very thing that provide mankind with purpose: having and supporting a family.

      If middle class wages create enough disposable income to support a good but not great consumer economy, it owes to the fact that millennial middle class, and now gen-z’s, are living rent-free with parents thus creating aforementioned spendable income. Put these ones on the street and force them to pay market rents, and consumerism is supplanted overnight by survivalism. See Gilets Jaunes movement in France.

      *BTW, my prediction is that the FED will flop (they get no flip from me) and restart QE by September of this year.

  2. robt says:

    In Canada I was offered 1 yr cashable GIC (CD) at 2.02% from one of the big 5 banks, barely less than the non-cashable 1 or even 2 year. Usually the cashable are at least 1/2% lower than non-cashable.
    The one-year publicly posted (i.e. ‘non-special’) cashable rate is 0.35%, the ‘insider’ rate is 1.5.
    Another indication of inversion, whatever the merit of the theory? Makes you think.
    The rule of thumb business cycle was 7 years, which used to hold fairly true until recent years: we’re heading on 10 years now into this one. There’s an old expression about pushing on a string …

  3. nick kelly says:

    Re: the consumer holding up and feeling confident.

    Why wouldn’t he when the US is borrowing 3 thousand million a day?
    (AKA 3 billion)

    The kids at the swank birthday party won’t know the parents are maxed on their credit cards and behind on the mortgage.

    But the Fed can print those dollars, so Magic Monetary Theory to the rescue.

    Re: today’s (4) stock market rally based on yesterday’s announcement that the Fed might cut rates, in response to trivial corrections in a frothy market. I think we are slowly seeing the waning of the Fed as an independent institution, and eventually its power and relevance.

    You wouldn’t want a doctor who treated you like the Fed treats the economy. “Doc, I’m feeling a bit down today, maybe pessimistic”

    “OK, let’s give you an injection to perk you up”

  4. Ppp says:

    If you read Powell’s speech CAREFULLY, you will see that he is telling you to get out of the market as soon as you can.

    The flight to gold is telling you that Treasuries will default. When and under what circumstances?

    • robt says:

      Fed men speak with forked tongue. But were it true, the little guys would be the last to be advised to get out of the market.
      Anyway, Treasuries would not default. The only default in living memory (just) would be the default of both government and private gold bonds in 1933 when the gold clause was invalidated (and the Supreme Court ruled that no damages for equivalence were due, and that they be paid in devalued (i.e. inflated) dollars).
      As a side note, I have a 50,000 mark 1922 German government bond with all the 6% coupons attached, that some poor sucker paid the equivalent of 1/2 million dollars for in today’s money. They were never defaulted on, but by November 1923 they were worth about zero so there was no need to default.

  5. I can’t recall this much VOL in the bond market, if Wall St is on the wrong side of the trade the unwind is going to be something to behold

    • Lemko says:

      Q4 2008 Equity derivatives held by banks in the US was 740 Billion… Q4 2018 JP Morgan held 2.2 Trillion alone! Around 3.3-3.4 Trillion Total today

      Prudential and DB are one counterparty blow up from complete mayhem across credit markets in the world… Citi , GS and MS are deep in Derivatives, shadow banking crisis will destroy the 08 meltdown. Will the stock market crash be as violent ? Maybe not cause Bailout will likely be approved on first request, unlike end 08 where first bailout was denied and it caused extreme selling in Sep-Oct.

      That said, your average person doesn’t understand why the Fed and CB’s across the world of so soft and will do anything just to keep Credit Markets active for a little longer… Capitalism is at stake, given the amount of financial destruction coming… Mnuchin removed Prudential from SIFI end 2018, it’s almost like these guys are trying to cause financial havoc. I am telling you as a freak into this stuff, it will be the biggest blow up the world as ever seen, the amount of debt in shadow banks across the world is at unseen levels.

      DB has a mkt cap of 14 Billion with 1.6 Trillion in Assets… How does that even make sense ? The leverage across the board is non sense, in almost every banking sector of every country… People will find out soon what the Fed is so scared of

      • Gandalf says:

        Fascinating post. Do you have references? Especially for Goldman Sachs?

        There have been lots of articles about the threat of CLOs and other leverage debt, and all I can ever find as to WHO has been investing in all that debt is “institutional investors”. It makes sense that insurance companies like Prudential and pension state/city pension funds have been some of the big players, as they have these huge obligations to yield at least 6-7% per year, which is impossible now except for more speculative investments.

        Given the current makeup of the House, I would seriously doubt that if Goldman Sachs goes down the tubes that Congress would fund a bailout. Lots of people want to see GS get theirs. We could yet have another, bigger Lehman moment

        • Wolf Richter says:


          To respond to your point about who buys these CLOs….

          Japanese banks have been huge buyers. They’re chasing yield. This year, they bought the majority of all CLOs that were issued. the regional bank Norinchukin Bank has been on the forefront of it, to the point where it is raising eyebrows even in Japan.

  6. Kent says:

    The economy is in about as good a place as it can be given the political and economic ideologies in play. And I don’t care what others have to say, the Fed has done a pretty good job since the Great Recession.

    Business cycle recessions used to be caused by wage gains outstripping productivity increases. Input prices would start jumping, unions demanded their COLAs, and businesses started losing money. The only fix was to cut costs hard and fast.

    But we are in a global economy now. If costs in the US start moving up, you can increase production in China. Or Bangladesh if they start moving up in China. Unions have been crushed. Don’t like your low-paying job? Quit and take a different one. Non-professional service sector jobs are pretty low-skill anyway.

    So I don’t expect any major recessions to come along for a long time. Even then, it will probably small by historical standards. These are the good times. Enjoy them.

    • Darrell says:

      Go to law school. Last time I saw a breakdown of the subsectors of that Professional Services sector, engineers and architects and the like were down or just barely treading water. It was the lawyers that were showing big growth.

      • chillbro says:

        This is factually incorrect. Legal services sector has less employed today than in 2008 and the wages are lower for the bottom 90% of earners too.

    • Gandalf says:


      See my post way down below. The era you are talking about of traditional business cycles with relatively mild recessions and booms was from 1932 -1980, when the pain of the Great Depression caused a huge clampdown on the ability of financial institutions to use debt.

      All that has changed. Increasingly, our economy has returned to the unrestrained wild and woolly era of the earlier United States, when financial panics happened regularly every 20 years because of over speculation in debt.

      The main that that is different now is that the Fed has stepped in as the enabler of this financial speculation.

      All it will take will be a mild recession, and kaboom, the huge debt bomb that has built up will explode. And this will make the economic recession much, much worse.

  7. Bologna says:

    Is the usa dollar going to be around for my life time ?????
    I’m 50
    Ps , I know it will be around for my life ,but I’m asking you this ,……as reerve currency

    • Wolf Richter says:

      Yes, the dollar will be around. But it’ll buy a lot less, and you’ll have to have a lot more of them to get by. Same as always. Count on it.

      • Ed says:

        You’ll need a lot more dollars unless you want to buy coastal real estate, clothes, food, or technology. Wait a minute!

    • Nurse Cratchette says:

      Don’t worry. In America, the average life expectancy is declining. At some point, the ‘reserve currency’ will probably switch over. But its not in the near future. The capitalists will kill us 50 year olds by denying health care and scraping more profits out of everything before it ever happens and by continually making life harder and harder. Now, if you were talking about investments that you are making now for a grandchild, there might be a different answer.

      • alex in san jose AKA digital Detroit says:

        Bingo. Been kicked off of Medi-cal because I was late with some paper work, mail takes an extra week or two to get to me because it gets to my boss’s house then he has to get around to taking to the shop here and giving it to me.

        I can still head to the ER if something’s bad, and I’ll get my medi-cal reinstated once I send in the paperwork, but this is what they’re doing to the bottom 90%.

        Also, ways will be found to keep lots of drugs flowing; the Sackler family got called out but ways will be found for the poor to always be able to access life-ruining drugs.

        Now we’re stopping Americans from going to Cuba; can’t have them see a good example of people living OK on far less, longer lives, free health care etc.

        Of course if it were me I’d buy or steal a catboat and just sail on over from Florida and defect, except it’s not home for me, Hawaii is. I may have to get back home by taking a cruise and jumping ship or hitching a ride on a transpac boat.

      • IdahoPotato says:

        If you’re British, don’t worry, they’re on it. The Brexiteers made it clear that they can’t wait to privatize the National Health Service and break it up into little chunks. They have already lost over 5000 nurses and midwives after the Brexit vote.

        American pharma and insurance companies spot an opening. No wonder 45 keeps bringing up health care when he is talking to British leaders.

  8. Studabaker says:

    The auto numbers are interesting. The overall numbers say the economy is doing well and wealth is growing. However, as Mr. Blitzer points out, it is very unequal. The business of making and selling cars relies on widespread demand. It relies on workers having enough money to buy cars. And that business is really hurting these days. On the other hand, if you are selling million dollars sports cars to the 1%, then they’ve got lots of money these days. So, the people who sell a similar product to a broad swath of society are hurting, but there is money in the elites if you can find something ridiculously expensive that they want to buy.

    • Wolf Richter says:


      The US auto industry in terms of unit sales hit a peak in 2000 that it didn’t hit again — and only barely — until 2015. The 15 years in between were one huge trough. Now sales are declining again. This is a terribly mature business where the product lasts longer and longer, and the age of the average vehicle on the road keeps increasing every year. It’s one of the toughest businesses around. It’s growth days are long over. It’s now just a matter of cyclical ups and downs within the same range.

      All automakers can do to increase dollar sales in this market is to increase prices or take share away from some other auto maker. And that’s it.

      People who want to see a broader economic decline in the travails of the auto industry need to look at the past 20 years for a good eye-opener.

      • wkevinw says:

        Basically true.

        The vehicles are very good nowadays. I have several that prove it. The companies have done a very good job of engineering for all kinds of performance criteria: fuel efficiency, reliability, etc.

        I like cars and trucks. Fascinating gadgets.

    • IdahoPotato says:

      Lol. “Mr. Blitzer”.

  9. Stan says:

    Wolf: Do you think the Fed will cut rates this year?

    • Wolf Richter says:

      If the economy spirals down, the Fed cuts rates. It always does. If it does, watch out for a stock market selloff, a big one. See the last two times.

      If the economy keeps growing at the Q1 rate, or thereabouts, the Fed is not likely to cut rates.

      That’s what the Fed heads were all saying today, for the millionth time.

      • MarkB says:

        Wolf, why would the Fed cutting rates stimulate a stock market selloff? Isnt a rate cut in fact what the market has been looking for to sustain its debt driven euphoric rise?

        • Wolf Richter says:

          Well, why would the Fed cut rates? Because the economy is heading into a downturn, and this is when layoffs hit, when consumers spend less because they lost their jobs, and this is when corporate sales plunge, and when suddenly their earnings go negative in a big way, and when companies default on their debts, and this is when the bloom comes off the stock-market rose. Economic downturns are not good for the stock market.

          Now, if the Fed cuts rates while the economy is red-hot, that would be a different story. But that’s precisely the scenario that I do not see.

  10. kk says:

    How can a central bank default on its own currency? That’s like a loser at a poker game saying he can’t write you another iou because he’s maxed out – not going to happen.

    • nick kelly says:

      It can’t default in its own currency. What happens is what happens in a poker game when the guy starts writing another IOU and is told no one wants it, and come to think of it when will he make good on the others.

      All this talk about King dollar forever or until there is a run on the USD overlooks the fact that this already happened in 1978.

      No one wanted USD including the US population who were buying gold, Swiss francs and Deutsche Marks like crazy. They drove silver to $50 an oz.

      Paul Volcker didn’t take the Fed rate well into double digits to be popular. But even this wasn’t enough to sell US bonds. It had to issue bonds denominated in Swiss francs. At that time the Swiss franc was tied to gold and could not be repaid in IOU’s

      I also think the Fed did a good job avoiding a complete crash of the US and world’s financial system in the GFC.
      But the emergency measures were for then, not for forever.

        • HowNow says:

          Fascinating… the only countries (at a quick glance) that I didn’t see among the defaulters are Canada and Switzerland (sizable economies).

      • panatomic-x says:

        “It had to issue bonds denominated in Swiss francs”

        i couldn’t believe that one but it turns out that it’s true. the bonds are known as carter bonds. this happened a year before i started on my economics degree. my professors never mentioned it. amazing.

      • Gandalf says:

        nick kelly,

        Excellent points, but the 1970s were a different time. It was the end of the post WWII era where US manufacturing was world dominating because the rest of the industrialized world had been destroyed.

        By the 1970s, Japan and Europe had re-emerged as manufacturing powerhouses and were competing strongly with US manufacturing.

        US trade unions were at a historical peak of their power (remember when the US media actually reported on which Presidential candidates got the support of the AFL-CIO like this was important?), many union contracts were on inflation adjusted wage scales. As a result, as inflation skyrocketed (largely as a result of skyrocketing oil prices), wages shot up also, in a classic wage price spiral.

        Not surprisingly, the rest of the world stopped thinking of the USD as the safest world currency to hold – the value of the USD was dropping like a rock at the time. The much more frugal Germans, Swiss, and Japanese all had currencies that were doing much better and so were considered safer from inflation.

        The total Federal debt actually reached an all time low (for the modern era) in 1975. And yet funding the not so terrible Federal deficits at the time became a problem, and continued to be one well into the late 1980s. Interest rates on Treasuries were so high that they were making up almost a third of the Federal budget every year.

        The Fed couldn’t do something like QE then because that would have just increased the inflation.

        So what’s different now?

        We have, through globalization and automation, basically off-loaded most of the problem of inflation. Cheap labor countries, eager for our dollars, no matter how inflated, and machines now do the work of unionized American workers. The CPI/CPE indices of inflation have been changed and rigged to no longer really reflect the true cost of the remaining inflation in this country (the non-durable goods sector). You can argue about what the true inflation rate is, but it is a fact that the CPI/CPE were changed specifically to make the official inflation rates lower.

        This low alleged inflation rate has in turn allowed the Fed to justify its current era policy of lowering interest rates whenever the stock market or economy get into trouble. Greenspan started this in 1987 when the stock market had that slight blip. Bernanke expanded this with QE.

        This is not the 1970s, for sure. Another thing that has changed is that Europe and Japan are no longer the frugal safe bets for a sounder currency compared to the USD. China’s currency is far too opaque to function as a world reserve. Increasingly, it seems that the only thing keeping the USD afloat as the world reserve currency is the “cleanest shirt in a dirty laundry” concept that Wolf talks about.

        All this is what has led to the idea that current popularity of MMT as a viable long term economic model for the U.S., that the US Federal debt can be allowed to continue to skyrocket, and that the Fed can continue to issue its low interest rate Treasuries and people will buy them.

        No, this is yet another transitional period in our economic history. We have merely been taking advantage of China and Mexico and other poor countries being willing and able to fund our low inflation rates, and the ability of machines to improve productivity at the expense of good paying jobs in America. The world economy has always been a competition, and MMT can work in the US only until another country comes along with a better and sounder economic model

        It’s hard to say what’s next. A debt bomb explosion from all this asset inflation by the Fed seems inevitable.

    • max says:

      Fiat money is based on trust — trust in honesty of Government — if people lose that trust there is no way for them to stop using its money.

      Fiat money do not last long it always get abandoned — because government can not stop it self from abusing it.

  11. Michael Engel says:

    FDN had a great +4% day, a bullish Haramy.
    Haramy in Japanese is a pregnant woman.
    After a long decline, FDN gap higher today, on short covering. Today green body is completely inside yesterday red body, above dma200.
    That’s a good sign !
    But today volume is half of yesterday. It indicate that
    quality of the rally is limited and the battle of dma200 will cont.
    RSI indicate a medium quality rally, in a bear territory.

  12. Rcohn says:

    Feds policies are completely captive of the bull move in stocks.
    Whenever the market looks to be on the brink the Fed says that they are willing to use new policy tools.But these new policy tools are having less and less of an effect.
    Are negative interest rates resulting in a booming CAPEX?NO! Why is this.
    The other side of the coin of very low to negative interest rates is very low expected returns on investment. Negative to very low interest have a number of deleterious long term effects. They permit zombie companies to remain in business. They destroy savers and the entire concept behind saving. They exacerbate inequality as companies buy back stock and stock are disproportionately owned by wealthy individuals.They encourage all levels of government to spend far beyond their means. And many more

    • Negative interest rates actually have an adverse affect in an ageing population where the birthrate keeps on falling with each passing year. Put another way zero or negative interest rates will hurt more people than it helps. The people who it helps have nothing to start with. Cutting interest rates worked during the baby boom era now in the baby bust era negative interest rates will take down the entire world’s financial system.

  13. Gandalf says:

    The 3 month -10 year rates did not invert in July 2016. Not even close. The 3month was at something like 0.28 %, the 6 month was at 0.34% and so this inversion indicator was not signaling a recession at the time, it was signaling the desire of responsible investors looking for a steady and ultra safe yield at the time
    There’s still 7 years left on those 10 year Treasuries. Doing a 6month bill makes sense now, it did not make sense in July 2016, and the 6month rate in fact did not beat that 2.14% 10 year yield until August 2018. So for two out of the last 3 years the now crappy looking 2.14% yield would have solidly beaten a strategy to only do a series of 6 month bills
    The 6 month rates are dropping again. If they drop another 0.15-0.2% points, then once again those 2.14% 10 year bonds would look pretty good.
    I think it’s important to realize that the sort of recessions we got in the tightly regulated banks and financial system of the post Depression era of 1932 -1980 were very different from what happened in the previous 130 years in the history of the United States and from what happened in the GFC of 2008-2009
    The GFC and the earlier regular 20 year cycles of financial panics were all caused by debt bomb explosions. They were generally triggered by mild recessions and turned the mild recessions into something far worse.
    There seems to be a strong consensus that the Fed has created another asset bubble that will result in another debt explosion. The question is only when not if this will happen.
    The thing about debt explosions, like what happened at Lehman, is that until they happen, the general economy might not look that bad, and then kaboom everything goes to hell in a hurry
    So the economy might not look that bad, but it only has to get a little worse

  14. Michael Engel says:

    As long as there is little demand for BA & GOOGL, this market
    at best, can have a medium quality rally.

  15. Markb says:

    Tell me.. if asset prices are ‘too high’ in the estimation of the Fed… why would they get 15 talking heads on in a week to make obtuse references to patience and fostering the expanding economy (which may or may not include a rate cut)?

    Why insist in one breath that Fed decisions are data dependent, not politically motivated, and in another breath try to backstop the politically motivated trade wars with promises of monetary accomodation?

    Is this the twilight zone!?

  16. WES says:

    Sometimes it is hard to figure out who captured who.

    Clearly here, the Fed monkey is inside the cage looking out at the Wall Street gorilla!

    Regardless, it is the bananas that should be worried!

  17. Iamafan says:

    To the pessimists: how come the Yen and Euro have not defaulted?
    Gosh, the Argentine Peso is still around.
    It’s all funny money anyway.

    The usd is King. Money printing is easy.

    • nick kelly says:

      The word ‘peso’ is a catchall in Spanish. The term has been applied to about eight Argentine currencies, all different. The current peso has only been around for a few years.

      Here is a recent example:

      Peso ley, 1970–1983
      Main article: Argentine peso ley
      The peso ley 18.188 (ISO 4217: ARL) (informally called the peso ley) replaced the previous currency at a rate of 1 peso ley to 100 pesos moneda nacional.

      The US dollar has lost about 90 % of its purchasing power since 1913 but it has never been withdrawn or replaced. Any dollar is still worth at least one dollar (collector value aside)

      You can’t talk technically about depreciation of the 1913 peso, because today’s peso is a different currency. The 1913 peso was a part gold coin.

      The difference in value is the millions.

  18. uncle scam says:

    The USA historically has ‘defaulted’ on its debt like 3 times since the early 1800’s, a little fact that is not taught to the ‘safety of the us-gov model’.

    The money can’t ‘default’, as the fiat is only as good as the Federal-Reserve ( private corp ) is trusted.

    IMHO short term t-bills are paying high premium, cuz nobody trusts the US-GOV long-term, so long term there are no buyers, short term there are buyers so the GOV must offer NICE rates.

    As all can see the Fed is just an issuer of FIAT, and plays to the politically loudest politician of the day, but its the US-GOV that re-negs on its promise to pay its debts.

    The fact is we all KNOW that US-GOV can’t repay on $210+ Trillion USD in debt, in fact receipts barely pay the interest today, with rates say 5%, then all tax revenue would go to pay the debt, so the US is a dead man walking.

    Solution? Own a little GOLD, own some CD’s in a lot of banks all over the earth and own some short term t-bills and enjoy the month2month rollover lifestyle. Have some crypto, learn to use it, so need be, if you need to ex-pat/re-locate you have a means of transferring your wealth abroad, as now legitimate transfers over $50k ring all kinds of bells.

    It’s all going down, and we can’t be sure in our lifetime, but studying the past US-GOV debt ponzi’s can give you a very good idea of which canary to watch in the coal mine.

    We don’t care really who prints the money do we? Just like in Hong-Kong the banks print the money, and its traded and trusted. Good money will always be kept and bad money pushed away, this is the way of Fiat.

    Money is just paper, as a child the paper said “In gold we trust”, now it says “In God we Trust”, I’m sure in not too distant future it will say “In Burning Man we Trust”, so what it was always about ‘trust’, and you either got-it, or you don’t.

    It’s probably good that the US-GOV doesn’t print the money, otherwise we would have already gone zimbabwe or weimar

    Historically when county’s go full-zimbabwe, smart guys leave early, those who stay suffer enormously, way better to sell-out early, and weather the storm abroad, as was done during the USA depression years, when the ‘elite’ all hit France during the worst of the USA depression.

  19. Eamonn Harter says:

    Capitalism only works when a large part of the population has capital to invest in new businesses. If most people waste all of it (or “consume” it, to use a euphemism), then they will never manage to get enough capital to start or grow a business. Too much consumer spending is not good for the future of the U.S. economy. Most of it will wind up in a landfill or as exhaust fumes in the atmosphere sooner or later.

  20. Nolo says:

    ‘This clamoring has zero predictive quality. It says nothing about what the economy will do next. It’s just a trick Wall Street performs to make more money at the moment. ‘

    Yes, and all that clamoring gets them what they want. Are you aware Powell is worth over 100 million? He is a player, not some clueless economist. He is a club member pretending he is not part of the club!

    Much of that consumer spending you tout is directly tied to gains in the stock market (and yes it means only a small percentage of Americans are really spending,). We will have a MAJOR rate cut soon, whether it is needed or not. Asset inflation is the only game in town as bond yields race back to zero and the QE machine ramps up again.

    • Wolf Richter says:

      “Much of that consumer spending you tout is directly tied to gains in the stock market…”

      In terms of the data in the article, stock market capital gains are not included in “personal income.” But dividend and interest income are included.

  21. The 10 year will snap back a few months before the 2020 election as they lie about everything to do with the economy to increase Trump’s chances of reelection. The ten year will then drop to zero or turn negative in 2021 and beyond meaning forever.

  22. Marc D. says:

    The economy’s doing fine. Unemployment’s at 50-year lows. And auto sales for May were up for FCA, Toyota and Nissan. So I don’t see a big need to lower rates to stimulate the economy. Wall Street’s just talking its book.

  23. Wisdom Seeker says:

    Thanks for posting the transcript! The time-delayed approach is good – people will listen, think, and then they can come back to the transcript for a closer look if they wish.

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