Is The Yield Curve Really Flattening?

There is a lot of talk now about a flattening of the yield curve.  This talk has been among the most intense right here at the website you are reading at this moment.  A flattening curve is commonly viewed as bad for gold, and according to Mark Hulbert, is an indicator of a coming recession.

But is the curve really flattening or is this all hype based on Janet Yellen's press conference comments?  Here is a chart the likes of which we have been using in NFTRH for many months now, the 30 year vs. the 5 year yield.


Here we should lend some perspective.  Okay Beuller, I ask you what is different this time from the last flattening?


I am not going to pretend to sit here like some genius blogger and post all the conclusions so that we all know exactly what is going on (according to one guy's imperfect world view).  But what we do know is…

  • In 2004 Alan Greenspan began to get the memo that his ultra lenient monetary policy had instigated a growing bubble in commercial credit.
  • As the stock market and economy began to show favorable signs this policy was incrementally withdrawn, which in normal times would be the thing to do.  The curve flattened in line with policy making goals (of tamping down inflation expectations).
  • Unfortunately, it also tipped the leveraged system into a domino effect of high profile corporate financial failures, that resolved into the crash of 2008.
  • Enter ZIRP in December 2008.  This was brave new policy decreed by the will of man and endures to this day.
  • The curve has been flattening for over a year now.
  • Some Fed jawbone "you know", flapped about a withdrawal of ZIRP sometime well out in 2015, "that sort of thing".
  • There is a distortion built into the system.  This is not opinion, it is a fact presented by the chart above.  Now, how it will resolve is up for debate among various eggheads.

But there is a running distortion on the fly and not you or I know how it will resolve.  It is not normal and it (in my opinion) belies desperation on the part of those promoting it.  To me, it looks like the latter stages of an 'all or nothing' operation that was put in play years ago.  'All or nothing' implies all in and totally committed.  Otherwise, why has ZIRP not already (and long ago) begun to be incrementally phased out.

One conclusion that can be made is that this alignment continues to be favorable to whomever it is that borrows from the Fed Funds window exclusively.  That is of course due to the beneficial (and again in my opinion, immoral) ZIRP.  They can lend out at any other point on the curve for a favorable spread.

The curve is not flattening when ZIRP is used as the short term measurement point, as it is when the 5, 3 or 2 year yields are measured.

And people wonder why the rich get richer.  They should stop looking at politics and start looking at finance (okay, the post rambled a little). | Notes From the Rabbit Hole | Free eLetter | Twitter


2 thoughts on “Is The Yield Curve Really Flattening?

  1. Thank you for the context and the broader picture. I still want to address your comments, "That is of course due to the beneficial (and again in my opinion, immoral) ZIRP. " and "And people wonder why the rich get richer."

    I halfway agree with you that the ZIRP interest rate policy disproportionately favors the rich. It is of course a supply and demand affected issue and imbalances do have some tendancy to spread out due to market forces. If the rich have more bond money, then that turns into more stock money and asset money and that translates into the average american consumer having more investment-related money to consume with, at least to the extent that the middle class still own assets. If rich get 80 cents out of every stimulus dollar, then that is indeed immoral, but it is less immoral than letting Great Depression II start.

    Before Reagan (and after Reagan to the extent that the economic community hasn't woken up yet), the prevailing economic consensus was that while there was a big policy disagreement on whether stimulating the economy with government spending or stimulating the economy with tax reductions would have a bigger positive impact on growth, both actions would at least act in the same direction. As far as I know there was no-one arguing that either of the two courses of action could ever have negative contribution to economic growth.

    Then the grand Reaganomics experiment started. Reagan and crew kept stimulating the economy via spending that administrations before him had done, but he cut taxation. The results are shocking to anybody with a conventional economic training that examined them carefully. Spending stimulus plus taxation stimulus together resulted in a significantly lower growth rate than just the spending stimulus had alone. Now there are some confounding variables as trade deficits dropped over the same period, union participation was lower than it had been, and so on, but these are all also actions that the traditional economics community tends to think of as positive things, so they don't help much in explaining things from their perspective.

    What helps is a realization that not all tax cuts or other stimulus are created alike. The economy is driven by a combination for supply and demand for goods and services that are consumed and supply and demand for capital that is used to facilitate production or trade. To boil it down simply, when there are lots of dollars chasing consumption, but no dollars chasing production factors, then you have an economic imbalance that will hurt growth. This is the socialist demon that all good young capitalists are brought up to fear and hate. When there is an imbalance in the other direction and you see consumption dollars dropping off while capital dollars skyrocket, you see interest rates head toward zero and capitalists are fighting for less and less efficient capital opportunities for the simple reason that they have more and more dollars to throw at those capital opportunities. Enter Minsky.

    This is why all great depressions start with low interest rates.

    What Reagan unwittingly stumbled on is the fact that cutting taxes on the wealthiest 1 percent of Americans, was a very effective way of creating more dollars available for innovation, but creating dollar demand for innovation and creating innovation are two entirely different things. Without a problem to be solved by innovation (which is an attribute of customers with dollars), you only see the same amount of innovation coming in at higher and higher prices. (not consumer inflation, but asset inflation). Meanwhile, the economy continues to hum along at the speed of its weakest link, and this link is not addressed by the polices.

    The key question is, how do we get out of this chain of events? The answer, of course, can be found in what worked in the past. You can compare economic growth of 1920-1932 (< 10%) to the growth of 1933-1945 (about 10% *per year*) and see that a New Deal would probably work again just like it did before. But do we have to go through 1929-1932 again to get to 1933 this time?

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