Increasing federal deficit

@cicerone imposter,

cicerone imposter wrote:

Averaging sounds good, but who knows what bond rates will be five years from now?

Nobody does, of course. But if you think future inflation will be much higher than the yield difference between inflation-indexed bonds and regular ones, then go to the derivative markets, take long positions on the former, and short positions on the latter. If your expectation is right, you will be rich in a few years.

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@cicerone imposter,

cicerone imposter wrote:

High Seas, It's expected that inflation will catch up with us sooner or later, and any fixed projections on bond rates cannot anticipate what will really happen - whether on the low or high side. Averaging sounds good, but who knows what bond rates will be five years from now?

There's no "averaging" involved, even with yield curve that's completely flat, because each payment made to the bondholders during the life of the bond gets discounted to the present at a different discount factor.

Currently the yield curve is the steepest it's ever been in the entire history of the United States, with some short-term rates falling even below zero:

http://money.cnn.com/.element/ssi/data/1.0/bonds/yieldcurve.gif

http://money.cnn.com/markets/bondcenter/

As to expected inflation rates, they can be seen on the yield curve itself, then calculated as "implied" rates for intermediate maturities (i.e. year 1, year 2, year 3 etc are visible on the curve itself, but years 2 to 3, 3 to 4 etc have to be calculated). This means that the difference between rates on TIPS (Treasury inflation-protected securities) and nominal bonds for equal maturities can NEVER be equal to the expected inflation rate, even with a flat yield curve, except by some extraordinary mathematical fluke (hasn't happened yet, but it's theoretically possible).

That's why these weird posts on "averaging" and on "implied inflation rate" are "not even wrong".

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@High Seas,

If they're "not even wrong," they're not right either.

If anybody knew what inflation rate will be in the future, why are most feds playing with interest rates that influences our economy in so many negative ways? Many economists now blame the housing and financial bust on easy money.

Where do you stand?

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@cicerone imposter,

cicerone imposter wrote:

If they're "not even wrong," they're not right either.

"Not even wrong" is in quotation marks because it's a statement made by a very great physicist, Wolfgang Pauli.

1 Reply

@High Seas,

How does any saying by a physicist (or anybody else) make the saying any more relevant?

1 Reply

@cicerone imposter,

It's an expression (properly attributed to Pauli) meaning that something is so far off the mark as to make it wholly irrelevant. Here's the exact wording:

Quote:

“Das ist nicht nur nicht richtig, es ist nicht einmal falsch!” (”That is not only not right, it’s not even wrong!”)

Pretty much what you said as well.

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@cicerone imposter,

Nobody knows the future, but we can examine the present and the past. At any one time the yield curve is visible to all, and if you think the market has mis-priced either the actual or the implied rates you can arbitrage between the two. If, when the specific maturity date arrives, you realize that you got your trades wrong, you just have to take a loss and not expect to get bailed out. Here's Paul Volcker:

Quote:

If you fail, you're going to fail, and I am not going to help you, and your stockholders are going to be gone, and your creditors will be at risk, and that is the way that it should be.

http://online.wsj.com/article/SB10001424052748704825504574586330960597134.html

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@High Seas,

High Seas wrote:

Quote:

If, when the specific maturity date arrives, you realize that you got your trades wrong, you just have to take a loss and not expect to get bailed out.

I agree with this 100%; and it supports my position that it's impossible to know when inflation will hit us and what the interest rate will be in the future.

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@High Seas,

High Seas wrote:

Here's Paul Volcker:

Quote:
If you fail, you're going to fail, and I am not going to help you, and your stockholders are going to be gone, and your creditors will be at risk, and that is the way that it should be.

http://online.wsj.com/article/SB10001424052748704825504574586330960597134.html

Bingo! Remember that a week or two after outlawing smoking in federal buildings, Volker packed his box of cigars under his arm, and resigned - about a week before the market crashed.

1 Reply

Yes, I'm worried about the federal deficit. It's like going on a shopping spree and sending the bill to your kids.

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@roger,

Fortunately Paul Volcker is back into the "ins" - probably because Geithner and Summers have been shown to be either wholly dishonest or incompetent fools. Volcker is the best Fed chairman we ever had, at least in the 20th century, by general consensus among financial economists. Btw, what do you make of Paulson's claim that the Russians approached China urging them to dump Fannie and Freddie bonds so as to completely freeze Western markets generally and U.S. markets in particular?

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Increasing federal deficit

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