Wednesday, September 21, 2011

Steep vs Flat Treasury curve, via channel theory

A steep yield curve, say for producing apples, indicates high gains from distribution. A flat curve means low gains from distribution. Gains from distribution are applesauce makers seeing profits from buying apples, and the farmers see profits from growing apples. We get a steep curve after a downturn because marginal producers have exited the field and remaining firms are more profitable. I generally skip the tight vs loose money analogy since distribution of actual goods in a network is the exact model.

What about the government channel?

The Fed is making the Treasury curve flat because its major customer, Congress, has low gains from distribution; Keynesian multipliers are low. So, how can Congress borrow over a trillion a year and not cause a rise in interest rates? The answer is they cannot, and as we see, Congress has had to discontinue whatever democracy they had and now we have a Gang of 12. Removal of democracy, asset controls, more police, and wars are symptoms of low government multipliers and the beginning of bankruptcy.

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