Permanent Yield Curve Inversion

Discussion in 'Economics' started by empee, Jun 12, 2006.

  1. empee



    Since FED controls liquidity and short-term interest rates, and since the FED has created excess liquidity -> overvaluation -> misallocation of capital.

    Because of this, actual producers can't get a reasonable payback by investing their capital (read actual producers looking for a return, not arbs, rollups, etc).

    Because of this, actual producers can't find a way to expand/invest their money profitably, so they put it in 10 years (or long bonds) since they have no where to put their capital (capital that would normally be used for production).

    The FED normal liquidity creation lead to injecting money into the system, which is then recycled over and over again as producers sell to consumers, (money flows from consumers -> producers), who produce more and repeat. HOWEVER, because producers can't find a reasonable payback, this cycle is cut short in that on the first iteration on money from consumer -> producer, REAL producers don't create more but put the money into bonds.

    The FED loses control because the more liquidity they inject, the more the curve inverts because producers refuse to produce anymore.

    So, we get to permanent yield curve inversion until markets drop, driving out speculators, arbs, etc until valuations are low enough that REAL producers can make money and start producing again.

    Thus, permanent yield curve inversion is a result of the FED, and this means FED Policy no longer matters. (ie FED loses ability to control the marketplace).

    I know, this is not what most ppl think which is why this could be how it all plays out.

    What do you think?

  2. jem


    Very thought filled questions.
  3. Kensho


    There was a king who once thought he was so powerful that he could stop the ocean from waving. It seems the global markets are like an ocean and the fed (the fed and people that think like them I refer to These People) wants to stop them from waving too much in one direction or another. What's wrong with These People? their wet dream it seems is linear economic growth absent any volatility. I wonder if after another volatile hurricane season These People will try to push weather modification. I wonder if a volcano goes off and kills two people These People will try to transfer snow from the glaciers and dump it into the volcano. I wonder if These People only have sex on operating tables wrapped up in aluminum foil and antiseptics nearby in case of any accidents.
  4. Producers of real goods in stell cemnet mining oil production housing tranportation etc. etc. have been highly profitable. In fact profit margins for the s and p have never been higher.
  5. freddo


    Allan tried this but he still gave birth to Bernie, so clearly it doesnt work.
  6. empee


    Remember,when ppl buy the long bonds they are removing liquidity, so attempts by the fed to inject liquiduity are offset by the long bond purchases to be neutral.