Delong wants us linear on the yield curve

Brad says:

To put it another way: as long as you can keep the economy on the upward-sloping rather than the flat part of the LM curve, linear models should be good enough for practical purposes. And the government has mighty fiscal policy and credit policy tools at its disposal that it can use to keep high-quality bonds, even short-term bonds, from going to par.

This says to me that we wants a light push on borrowing by qualified borrrowers so the search for growth has some constant force behind it.  I interpret that to mean we get an upward sloping Treasury curve that obeys the law of conpouunding interest from short term to long term. Using rough approximations (I am lazy today), then, we want the one year rate to be about 1/10 of the ten year rates. So a one year rate of .21% should go with a ten year rate near 2%. 

That linear region is what we have today, the ten year is 1.95, the the one year is at .21.  The one year rate has barely exceeded .25, interest on excess reserves, rate for the entire period since the crash. This chart on the left is the ten year minus the one year. When that blue line goes above 2.3% or theree abouts, then we are violating Brad's linearity by my assumptions, and he may disagree. But, as we see, two things cause the curve to steepen too much, 1) The stimulus, and 2) The active purchasing of bonds by the Fed. Both activities supported by Brad.

Right now we have three things going on. The ten year rate is slightly less than the growth rate, the implicit price deflator is near zero, so no inflation, there is no stimulus, the deficit is being reduced, taxes are still rising,and the Fed has quit implementing bozo theories from MIT Basket Weavers. And with the cease and desist of crazed central planners, we are linear. I hope it lasts, I make no predictions.

One last thing.  See that jump up in rates in 2010 and again in early 2011? That would be someone in Treasury dumping all the stimulus debt on to the 6-10 year term.  All that is coming due soon, either on Ben's legacy portfolio or on the public holdings. Also, coming due now is all that stuff Bush the Younger dumped at the long end just prior to the crash. I think the CEOs of the big banks pointed this out to Obama early on as a problem, and hence he got onto the sequester, a very good move.