Proposed Negative Rates Really Expose The Bond Market’s Appreciation For What Is Nothing More Than Magic Number Theory

By far, the biggest problem in Economics is that it has no sense of itself. There are no self-correction mechanisms embedded within the discipline to make it disciplined. Without having any objective goals from which to measure, the goal is itself.

Nobel Prize-winning economist Ronald Coase talked about this deficiency in his Nobel Lecture:

This neglect of other aspects of the system has been made easier by another feature of modern economic theory – the growing abstraction of the analysis, which does not seem to call for a detailed knowledge of the actual economic system or, at any rate, has managed to proceed without it.

Economists think they’ve solved all the problems worth solving. Debates today revolve around fine-tuning; how we make out models a little bit better. No one ever stops to ask, do we even know what we are doing?

Because Economists have taken over the top jobs at every central bank, and because central banks are the world’s first real beta test of technocratic capabilities, they’ve been handed carte blanche and covered at each and every turn. There’s a lot riding on their success both within and without.

No matter what, central banks are central, they say. This clouds what should be often very straightforward analysis and interpretation. The Fed says rate hikes and inflation. The bond market says something very different. Bonds wrong!

The WSJ today:

Investors and Federal Reserve officials watch the gaps between shorter- and longer-term interest rates to gauge the health of the U.S. economy. Right now, the two groups are seeing different things.

Even though the article acknowledges how federal funds futures now show a greater than 50% chance of a rate cut in October (2019, not 2020), the guy they pick to quote is quite positive about all this reduced rate benefit.

Lower short-term lending rates could stimulate growth and inflation by making borrowing more attractive, leading the 10-year yield to rise relative to the two-year yield. Mr. Ellenberger said he is betting that the gap between two- and 10-year yields will widen.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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