Tuesday, July 14, 2009

The Deflation Argument

An erudite but understandable argument for much lower Treasury yields is put forth in Debt Acts as a Brake on the Monetary Engine. (No excerpts as it is a pdf file.)

Charts 1, 2 and 4 are especially interesting. The specific comparison to Japan is a "must read". Econblog Review has been comparing the U. S. economy to that of post-bubble Japan since EBR's inception late last year. Nothing has happened to change that hypothesis. We have the same over-optimistic government forecasts and the same sort of propping up of "too big to fail" banks that are also too weak to succeed.

At least in the most populous part of the most populous State, the economy continues to weaken: there were not even any green shoots to wither. One hears this both from businesspeople and simply from the fact that the State in its May forecast for June receipts once again overestimated the degree of economic activity that would occur in June. One wonders how long the underestimation can go on! At some point down will look like up, as the book by Richard Farina suggests.

We are entering a seasonally weak time for gold and stocks and seasonal strength for Treasury bond prices (generally declining yields). Last year was so extreme that one wonders if mentioning this historical pattern means even less than usual.

But getting back to the linked article that began this post, no matter when the current economic downturn is "officially" judged to end (perhaps already), it may well be that stock and bond prices will better track absolute employment levels than technicalities. After all, economic output that has fallen fast and far can rebound just a little and show growth, but it will still be a weak economy with great slack and many downside risks.

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