Friday, March 11, 2016

The bond market has SecStagged us


LONDON (Reuters) - World markets may have recovered their poise from a torrid start to the year, but their outlook for global growth and inflation is now so bleak they are betting on developed world interest rates remaining near zero for up to another decade.

Even though the U.S. Federal Reserve has already started what it expects will be a series of interest rate rises, markets appear to have bought into a "secular stagnation" thesis floated by former U.S. Treasury Secretary Larry Summers.
The idea posits that the world is entering a peculiarly prolonged period in which structurally low inflation and wage growth - hampered by aging populations and slowing productivity growth - means the inflation-adjusted interest rate needed to stimulate economic demand may be far below zero.

Let us go through the logic

Monetary velocity, relative to time, is way down.  It takes longer to collect insider information and make a bond deal. So the short end of the curve is flat, non-existent, and retail banking operations are collapsing.  Velocity is down because there is no discretionary spending, so price discovery is slowed.  The discretionary spending was absorbed in entitlement and pension taxes.  The problem is compounded by regulation costs which has driven up monetary transaction costs.  We mostly have financial regulation to protect government in the Swamp from absorbing more losses.

We need banker bot badly.

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