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Negative Interest Rates Have Arrived

public-debt

This might be a bit hard to read, but it is the daily treasury auction results showing that today’s issue of TIPs came out with a negative -0.55% interest rate.

The times are really changing.

Tony Crescenzi from PIMCO explains what this means: “investors in TIPS receive the real yield plus compensation for inflation, as measured by the consumer price index. In other words, while the yield on many TIPS is negative, investors in these securities expect a positive return overall, owing to expectations for inflation that are greater than the negative yield on these TIPS…Engineering a negative real interest rate environment helps the Fed to affect the medium-term and at the same time preserve the view that deflation will be avoided over the longer term such that the inflation rate normalizes, say at around 2.5%.”

Japan has lived with negative interest rates for years but their economy has not experienced a return to growth. Much of that comes from their extremely poor demographics that leads to significant numbers of savers and fewer spenders.

Can the same thing happen here? Our demographics are much better than Japan’s. Look at the graphic below:

screen-shot-2010-10-25-at-71043-pm

You can see how over the years, the population of Japan has grown very top-heavy in the older generations as the younger generations did not replace themselves adequately.

Here is the population pyramid for the United States:

screen-shot-2010-10-25-at-71657-pm

Notice how this one of the US is not nearly as top heavy as the one of Japan. That means there are consumers who help propel economic activity.

Next week, we get the elections and the likely beginning of additional Federal Reserve monetary stimulus through Quantitative Easing.

I believe the most likely result of further monetary stimulus will be to increase prices of base metal and commodity inputs into production that will ultimately lead to the cost-push inflation we all learned about in Econ 101 – all while unemployment remains high.


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Mark