Bond market finally back to normal -- money junkies may start tweaking

For many years, the most important market in the world – the U.S. market for money lending – was a free market. “Bond market vigilantes” made sure that the crucial 10 year Treasury yielded 2.0% - 2.5% over the inflation rate. This was true for many decades and was reflected in the yield of TIPS after they were introduced in 1997.

The Federal Reserve rarely interfered and (except for Paul Volcker) changed the fed funds rate with a light touch. Fed assets barely budged.

Ever since the 2000 tech bubble burst, the Federal Reserve has been pumping free or even negative real money into the asset markets.

After the 2001 recession, Fed Chair Alan Greenspan cut the fed funds rate and held it longer than the recovery. After the 2008 financial crisis, Fed chair Ben Bernanke cut the fed funds rate to zero and also pumped longer duration money with Quantitative Easing. Fed Chair Jerome Powell did the same during and after the Covid 2020 recession.

The money pumped by the Fed mostly stayed in the asset markets, inflating the prices of bonds, stocks, real estate and other assets (such as cryptocurrency, etc.). Companies borrowed at ultra-low interest rates. The asset markets became addicted to free borrowed money.

As all METARs know, the Fed has been raising the fed funds rate since 2022 in an effort to quell inflation. Only recently has the cost of money approached the normal free-market yield typically set by the bond market before the decades of massive Fed meddling.

Investors Need to Worry About the Bond Market’s Return to Normality

The economy was mainlining cheap money, and the withdrawal symptoms have only just started

By James Mackintosh, The Wall Street Journal, Aug. 16, 2023

Now things are back to what used to be normal in bonds. There was a time when the rule of thumb was that 10-year Treasury yields should be around 4%, made up of the 2% inflation target plus real yields of 2%, roughly reflecting economic growth.

That time seems to be back, more or less, with investors pricing bonds for an inflation rate of about 2.4% over the next 10 years, which with a 1.89% real yield leaves the Treasury yield at 4.2%. That real yield is also bang in line with the consensus of Federal Reserve policy makers, who expect long-term economic growth of 1.8% a year…

The risks are twofold. First, we have only just started to test the ability of the economy to withstand higher rates. This is most obvious in rising loan default rates, weaker demand to borrow and a sharp tightening of lending standards by banks. So far, only the very weakest borrowers have hit trouble…

The economy was mainlining cheap money, and the withdrawal symptoms have only just started…

If the economy has become permanently more inflationary even than it was in the 2000s, then the Fed will have to run with higher real rates to hit its target. Perhaps higher real rates aren’t about decent long-run growth prospects, but weak growth combined with deglobalization, more military spending, catch-up infrastructure investment, green subsidies and all the other inflation-inducing policies that politicians have suddenly come to love… [end quote]

The WSJ article didn’t mention the elephant in the room – the most inflationary factor of all – the immense growth of entitlement spending forecast for the next 30 years. Spending on Medicare and Social Security goes directly into consumer pockets without increasing economic productivity.

Companies with weak balance sheets (especially “zombie” companies that can barely make the interest payments on their low-interest loans) will take time to default as their debts mature and must be rolled over at higher interest rates.

The bond market is finally almost back to normal – the pre-Greenspan normal of 2% real yields. Will long-term bond yields fall when the Fed begins to cut the fed funds rate, expected in 2Q2024? That remains to be seen.

Meanwhile, the stock market is back to bubble valuations. Priced for perfection. Will it stay that way once the money junkies start tweaking? That remains to be seen.




One of many sites on this subject:

The Economic Impact of Social Security | The Daily Yonder.

The economic impact of Social Security is huge: $1.2 trillion in economic output and 8.4 million jobs. Social Security plays an even larger role in the economy of rural America.

Another one:

For that year, social security benefit payments supported about 1.4 trillion dollars in economic output, around 9.2 million jobs, approximately 774 billion dollars in value-added (GDP), over 370 billion dollars in salaries and other compensations, and over 444 billion dollars in total tax revenues.


You did not understand what she meant.

Benefits are paid without the recipient considered being currently employed–and thus adding to GDP in order to get the payment. It does get confusing for non-economists, but that is the nature of pretty much all retirement plans making payouts.

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She said ‘economic productivity’ not ‘economic activity’.


It is very much economically productive.

Productivity is also the inputs of demand. As we approach economies of scale we pay for factories locally and supply the world. The faster we pay for our factories the more control we have over inflation. Government outlays for social programs add a great deal to optimizing our economy the ultimate in productivity results.

From 1981 to 2020 SS did not add to our productivity because we were led to believe taking care of the American economy and Americans meant someone had to pay more in taxes. The other part of that equation was someone was ripping us off and not paying as much taxes as they should have been. It was all in lying to the American public.

Bottom line Wendy SS is helping US factory productivity now that we have an industrial plan.

Almost, but not quite. Demand is, to a significant extent, income-based. There are two types of demand: Essentially fixed demand (which varies only slightly based on income), and then there is discretionary demand.

They are easily identified. Non-discretionary spending is comparable to parents buying food, clothing, etc for the family. This is a fairly consistent amount every month/year and is spent on a range of goods and services that is fairly uniform year after year. Discretionary spending is the money given to their teenage kids to spend on whatever they want. This amount changes every month and is not in any one category unless it might be called the “what I want NOW” category. Clothing one month, music another month, Taylor Swift concert another month, and so on.

Thus, the inputs for demand for each general/specific category will average out over a period of time–but may also be highly cyclical (i.e. Christmas, St Patrick’s day stuff, and so on). The inputs will vary significantly based on expected demand for discretionary spending while demand for non-discretionary spending does not change much, so those inputs do not really change over time. It is also why companies (and school districts) are aware of population trends. More/fewer babies means more/fewer diapers, need for school TYPES (i.e. pre-, elementary, middle, high schools over time). And lots more.

@jerryab2 in this B2B demand is more important.

What percent of GDP is B2B?

CEBR estimates that the value of B2B expenditures each year amounts to nearly half (48%) of gross output (the total value of sales or receipts) in the U.S. economy. This means that for each dollar spent in the U.S. economy, approximately 48 cents are B2B transactions.Jun 1, 2021

How much does the US spend on B2B marketing?

B2B traditional ad spend in the U.S. 2020-2024

In 2022, business-to-business (B2B) traditional advertising spending in the United States was projected to amount to 17.7 billion U.S. dollars, marking a 5.8 percent increase from the previous year.Jun 26, 2023

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