Chart of the Day:TIPS Derived Inflation Expectation
Update: Both charts above and the comments below have been updated, based on using 10-year constant maturity yields for both Treasury series (thanks to Michael Pond for suggesting this).The top chart shows the weekly, bond market-based 10-year TIPS-derived expected inflation back to 2003, calculated as the difference between 10-year regular, nominal Treasury yields and 10-year Treasury inflation-indexed yields, both on a constant maturity basis (St. Louis Fed data here for 10-year TIPS and here for regular 10-year Treasuries; see the bottom chart for those yields separately.
After an unusual period in late 2008 resulting in a narrowing spread when the TIPS 10-year yields were unusually high and approaching 3%, and regular Treasury yields were unusually low and approaching 2%, the Treasury market seems to have stabilized, and the bond market's 10-year expectation of inflation is back around 2.5%, consistent with the inflationary expectations from 2003-2007.
29 Comments:
I'm not sure I know why, but the St. Louis Fed numbers on the 10-year breakeven spread do not match at all the numbers I see on my Bloomberg screen. The current 10-yr spread is 1.83% for example.
5-yr 5-yr forward spreads do appear to have come back to where they were before, however.
Inflation? I wish we had a bunch more. Bring it on. Run the printing plants 'till the plates start to melt.
There ain;t no way we are ever paying off the debt we have built up in thes country w/o a good, long swig of moderate inflation.
Nobody wants to go back to the top tax rates of the 1960s and even 1970s, for 70 percent to 90 percent.
Nobody wants to kill rural subsidies, eliminate the home mortgage interest tax deduction, or cut the Pentagon in half.
Ergo, we have one way to not leave of children and grandchildren deeply in debt: Inflation. Learn to love it.
Benjamin, you seem to be forgetting the negatives of inflation. Our currency becomes persona non grata, and we will have effectively started a money war.
I guess one positive would be that without China buying our debt, we'd HAVE to have a balanced budget.
A weak US dollar? Bring it on. Domestic manufacturing would blossom, and our trade deficit might moderate.
I do recognize one weakness in my "run the presses" plan: Keeping inflation "moderate" might be tricky. In general, I would like 5 percent inflation for 10 years.
Can that be managed? I don't know.
But I have to see any strong arguments against the virtues of moderate inflation, given the realities of the US budget, and entrenched interest groups.
Even readers of this site, who claim to detest "market distortions" brought about by government, quickly retreat and equivocate when I suggest wiping out the Dep't of Agriculture and all rural subsidies (especially subsidized highways), or elimination of the social engineering called the home mortgage interest tax deduction (a star player in over-housing America, and the housing bubble).
And legalizing and taxing prostitution, drugs and gambling?
Forgetaboutit.
We want to beat up on minimum wage workers. Yeah, those minnie workers are bringing us down.
We won't face facts. So, inflation is our friend.
benjamin showing us his delusional side again says: "There ain;t no way we are ever paying off the debt we have built up in thes country w/o a good, long swig of moderate inflation"...
Hmmm, you want to explain how a cheaper dollar will somehow actually pay for something?
"Nobody wants to go back to the top tax rates of the 1960s and even 1970s, for 70 percent to 90 percent"...
So YOU want someone else to pay YOUR share of the costs of government services you think you need?
"But I have to see any strong arguments against the virtues of moderate inflation, given the realities of the US budget, and entrenched interest groups"...
Well benjamin you are of course talking about the realities of the US budget due to the socialist nanny state programs, right?
"Nobody wants to kill rural subsidies, eliminate the home mortgage interest tax deduction, or cut the Pentagon in half"...
Says who?
BTW having an armed force is Constitutional but rural subsidies are at best questionable...
"We want to beat up on minimum wage workers"...
Who is this alledged 'we'? Do you have a mouse in your pants?
The following is from the WSJ...
Note which states are the problem ones: Numbers On Welfare See Sharp Increase
No. 1-
I say all subsidies in the federal budget have to go. Nanny or otherwise. The home mortagge interest tax deduction is part of the nanny-state. It is social engieering, and has distorted markets to encourage overinvestment in housing.
Yes, we need a military--even the most hard-core libertarian agrees to that, as other nations are not libertarian states.
Do we need a $600-billion military when there is no sovereign nation anywhere even contemplating an occupation of the U.S.? I said cut in half. Not eliminate. I happen to agree with Ron Paul, who out loud wondered what the hell US troops are doing scattered all over the globe, permanently or on missions. Everyone cites our founding fathers, so I may cite them too, and say they warned against "foreign entanglements." Words to the wise.
A cheaper dollar makes it easier to pay back US debt. Remember, we pay back in dollars. We owe (I forget exact amount) $10 trillion. That amount becomes much more maanageable if inflation cuts the real value of $10 trillion in half. Even foreigners will just have to eat it. Unlike other nations, we pay back in coin of the realm. The dollar.
I say "we," in that I mean we libertarians and free-marketeers lack the guts to truly cut the federal budget and the social engineeting-tax cuts that goes on. So, we pick fights with minimum wage workers. You know, like in a bar fight, two guys insult you, and you slug the small one.
I may have a mouse in my pants (but not a gerbil). I may have a banana in my pants.
But I crap in my pants when I look at the accumulauted federal deficits we are leaving to our children, and the total lack of will to pay them down in a timely manner.
We so completely lack that will, inflation is the only avenue left.
The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation
- Vladimir Lenin.
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
... As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
- John Maynard Keynes
It seems that not even Benjamin's favorite economist agrees with his gibberish.
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"Do we need a $600-billion military when there is no sovereign nation anywhere even contemplating an occupation of the U.S.? I said cut in half"...
Hmmm, I was thinking it needed to be doubled at the very least...
"I happen to agree with Ron Paul, who out loud wondered what the hell US troops are doing scattered all over the globe, permanently or on missions"...
I've often wondered about Ron Paul's apparent inability to comprehend both recent history and economics...
I know Ron Paul has a real problem when it comes to earmarks...
I'm just quessing here but if we as a nation dumped medicare, medicaid, and social security we as a nation might all of sudden be out of the red ink sea we're mired in...
Robert Miller-
Check me if I am wrong: We have 11 carrier groups, not more than a dozen.
I say that is about five too many.
Robert Miller-
Check again: Are they not properly referred to as "carrier strike groups" ?
For the record, my favorite economists are Milton Friedman and Adam Smith. And that Austrian guy, but I can't remember his name.
"I say that is about five too many"...
Well of course benjamin like your ability to foist yourself off as a 'free marketeer' and 'libertarian' you'll now show us why you can foist yourself off as a strategic and tactical genius, right?
Tiger Hawk has a JP Morgan chart which he describes as 'grim'...
I wonder just how accurate it might be...
No. 1-
That is a grim chart from JP Morgan. Another reason for Bernanke to get make sure the night crew is running those printing plants 24/7, hot, hot, hot until the plates melt.
There is tons of slack in this economy.
The same military spending that gives the brave men and women of the U.S. Armed Forces the edge in any fight also helps to keep malcontents, like Benjamin, safe at home - out of harms way.
Technology, while expensive, is a "force multiplier" making it possible for the U.S. to defend it's interests with fewer citizens. As a result, we can meet our defense needs with an all volunteer force.
Those that do step up to answer the call, know that the nation has made the necessary investment to ensure that they have the very best training and equipment.
Now, Benjamin, and his ilk, would like to undermine that commitment. That's sure to lead to U.S. troops facing even more perilous circumstances as they fight for our liberty. But that doesn't bother Benjamin.
It would be cheaper to cut military spending in half and draft malcontents, like Benjamin, to fight our enemies with switchblades and trash can lids. And if it were only Benjamin and his buddies who were at risk, I'd say let's give it a go. But since I happen to know a couple of those guys over there, I say to Benjamin, STFU.
Anon-
As a liberatrian, I say your admirable friends should not be "over there."
Beware of foreign entanglements, as our founding fathers said.
BTW: It was the Bush Administration that authorized $300 million to the Taliban, to help quash opium production in Afghanie. Of course, they used the money, but we don't know how.
Why do I mention that?
Because when we get involved in other countries, we do not know what we are doing. Everybody is an expert--on the basis of reading some articles in magazine or report, or visiting carefully selected people in the target country.
I have lived in the US for more than 50 years, yet there are whole parts of this country I have not visited, and whole segments of the population I do not know well. I am typical in that regard, if I little more honest than most.
Now, how is an American supposed to go to Country X for a couple of years and emerge an "expert"?
I don't buy it.
I accept that they think they are an expert, and that they think they know what to do.
Avoid foreign entanglement.
From the very right-wing, free market Cato Institute:
http://www.cato.org/pub_display.php?pub_id=3556
read it and weep
When you think about it, after several hundred billiosn dollars and 5,000 dead, we have established in Iraq...a Shiite Islamic government, not a secular one.
Maliki's favorite vacation spot? Shiite Iran. He hugs Ahmedinijad everytime he sees him. They are on friendly terms, to say the least.
Will Maliki survive our departure?
No one knows.
Does anyone think this shows we know what we are doing in Iraq?
I crap in my libertarian pants whenever I think about this.
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Hey, when I saw Milton Friedman speak (this was more than 30 years ago, so forgive my memory), he said the FDIC had worked, but that he thought private-sector deposit insurance would have worked better. Maybe I went too far when I said Friedman said the FDIC was a "waste." But he did think private-sector insurance would be better.
Interestingly, Friedman anticipated (at that time) the pending S&L collapse, by saying government deposit insurance would mean that depositors would not care about the strength of the institutions in which they banked...they would just go to the highest yields.
In fact, Freidnman was right, as depositors flocked to the FSLIC-insured thrifts in the 1980s, and they busted.
We taxpayers had to make up the difference.
I think I know my Friedman.
As for Austrian economists, are you sure I did not mean Ludwig von Mises?
And indeed, here is the full quote, not truncated, as by Cheech:
Circumstances alter cases and I believe that both views are correct. Anna Schwartz and I in our Monetary History were discussing the situation after the financial collapse of the 1930s. We said then and believed then, and I still do, that the Federal Reserve had failed to do what it was originally set up to do. It had permitted a collapse of the monetary system, it had permitted perfectly sound banks to fail by the thousands because of liquidity problems, although it had been set up in 1913 with the objective of preventing that kind of a situation. And we argued in the book that since the Fed had failed and showed no sign that it was not going to continue to fail in pursuing its function, something else was needed to perform the function for which it had originally been established and that the Federal Deposit Insurance Corporation would serve that function. Interestingly enough, it did for some 40 years. From 1934 to the early '70s, there were very few bank failures. And there were essentially no runs on banks because of liquidity problems. So it did serve a useful function for 40 years.
In my opinion, what destroyed the usefulness of deposit insurance was the inflation of the 1970s for which the Federal Reserve has to bear major responsibility. That inflation had the effect of destroying the net worth of financial enterprises, particularly the savings and loan institutions, which were borrowing short and lending long. They had mortgages and the like outstanding at fixed relatively low rates of interest. When the cumulative inflation of the 1970s inevitably led to a rise in the interest rates they had to pay, the result was to wipe out the net worth of the proprietors of those enterprises. Once the net worth of the enterprises was destroyed, deposit insurance did have a very perverse influence. In order for deposit insurance to work, there has to be some private personal incentive for safe banking. That incentive was provided by the net worth of the proprietors of financial institutions. Eliminate that net worth and deposit insurance created a win-win position for proprietors of those enterprises to engage in risky activities.
If Cheech is reading, you might try to exert a little more intellectural honesty, when advancing your viewpoints.
Here is Firedman discussing the perveerse influence of deposit insurance.
I would say Cheech is intellectually dishonest, by takng a quote out of full context
Benjamin and some other inflation-loving commenters have completely forgotten what inflation means. High inflation is a spending tax.
When something used to cost $10 but now costs $12 due to inflation, that is the equivalent of a 20% spending tax.
So, with high inflation we would save money paying off fixed-interest loans and bonds, but we would lose money with every purchase.
Which do you think is more: the annual payments of federal debts or the total annual purchases by everyone and every business in the entire nation? If you guessed the latter, you are correct. High inflation is economic suicide, and moderate inflation is economic maiming.
Mr. T-
What do you mean? If there is universal 20 percent inflation, then wages and incomes rise by that amount too. Only cntractual indebtneddness would relatively shrink (if the contract did not call for inflation-adjustments).
Yes, if you are on a fixed-income, you should hate inflation. But most people have variable incomes. Maybe rents rise, and they gather more rent. Wages rise.
Besides, I go back to this point: Who has a politically viable plan for paying back the national debt?
I say nobody in America wants to give up their favorite federal programs or tax breaks.
Cut Social Security and elders would scream. Cut Agriculture and farmers will kill you. Cut HUD, and real estate developers will raise money against you. Cut Defense and the defense crowd will scream holy murder.
And nobody, nobody wants to pay more taxes.
Okay, now pay off the national debt.
@Benjamin:
I'm sure if you can't remember the name of one of your favorite Austrian economists, you haven't got a clue what he (or any other Austrian economist) thinks.
"I have a favorite color, but I forgot what it was." - Crap Pants
This is Benjie's brain: o
This is Benjie's brain on drugs: .
You most certainly overstated Friedman's position that the FDIC was a "waste" and your own extended quotation proves that. He continued to blast the Fed, not the FDIC. He stated then what is still true today: that the FDIC has effectively put an end to bank runs. The IndyMac run, caused by Chuck Schumer, is the notable exception.
Friedman is speaking about the Moral Hazard and Principle-Agent problems created by deposit insurance, something that EVERYONE in economics and banking understands. The net effect of this on lending practices is negligible - deposit insurance protects depositors, not the banks.
What Friedman did not consider (and you completely don't understand) is that insured institutions are regulated and periodically examined. If banks make numerous bad loans, the regulator can impose Civil Money Penalties on bank officers, revoke their licenses, and close the institution.
In the Savings and Loan Crisis and the current crisis, the regulators of the Thrifts didn't do their jobs well. Score 1 against government. But the presence of deposit insurance had absolutely nothing to do with thrift lending practices and their subsequent failure.
In the absence of deposit insurance, depositors will STILL make bad choices of their deposit institutions. Gaining information will be too costly for them.
Private bank monitoring companies won't do any better job at identifying problem banks without deposit insurance than they do now in the presence of deposit insurance.
Stockholders of corporations have precisely the same Principle-Agent problem with corporate management. Despite thousands of private corporations providing information to investors, that problem hasn't been eliminated.
In short, if bank examiners who are trained to recognize and rate bank capital, asset quality, management, earnings, liquidity, and sensitivity to market risk (CAMELS) can't identify problem banks, the public at large and private corporations with no peeks inside bank files won't do any better at it.
In the absence of deposit insurance, all you'll get are widespread panics that push even healthy banks into liquidity crises.
The concept of market failure has still not penetrated your thick skull. Please, before you post another word, spend a day or two reading on Wikipedia:
- Market Failure
- Externalities
- Principle-Agent Problem
- Free Rider Problem
- Asymmetric Information
- Natural Monopoly
- Public Goods
That's Principal-Agent problem. Pardon my spelling.
Cheech-
Three decades back, when I was helping to re-fashion regs pertaining to the thrift (S&L) industry, we did not anticipate what would happen: Some thrifts would set up phone banks, solicit deposits nationwide with advertisements in national publications, and garner tens and even hundreds of millions of deposits in a few months. The thrift industry hitherto had grown mostly deliberately and slowly, on passbook accounts. This may have been before your time. Reg Q and all that.
Once certain (not all) S&L execs got ahold of that "hot deposit" dough they lent it out wildly, or corruptly.
Depositors got all their money back, and did not care a whit. Taxpayers took a whack.
As Friedman indicated in his lecture (towards the end of the 1970s it was), he had lost faith in federal deposit insurance and the FDIC, in an inflationary environment. Well, guess what, we have inflationary environments from time-to-time. Friedman, in the full quote (not truncated), calls federal deposit insurance a "perverse influence." I guess that is not a waste, but it is close to it.
Now, private deposit insurance would likely have operated differently. Private insurers, risking their own capital, would not have extended insurance without stuffer terms. I can't imagine a private insurer extending insurance to, say, the Keating empire.
Ludwig von Mises. Can't remember his name. I always think of another Ludwig, as in classical music.
Kind of like principal vs. principal.
I have principles, but the prince is not my pal.
Good luck Cheech, there in Marin County.
--Benjamin
As usual Benjamin, you are googling quotes by Friedman but you haven't got the faintest idea what he's talking about. You are a parrot who doesn't understand the sounds coming through his own vocal chords.
Here is the entire text of what he said in that interview.
Regarding his position on deposit insurance in A Monetary History and his more contemporary statements, he began by saying:
"Circumstances alter cases and I believe that both views are correct."
He specifically said that his former view and his latter view of deposit insurance were not in conflict - that circumstances dictated the efficacy of deposit insurance.
Friedman said that the actions of the Fed in the 70s created an inflationary environment under which deposit insurance had a "perverse incentive".
He said:
"In order for deposit insurance to work, there has to be some private personal incentive for safe banking."
He wasn't condemning deposit insurance, you fool. He hadn't stated that his opinion of deposit insurance had changed permanently. He was condemning the Fed for creating a situation in which deposit insurance was ineffective.
Polly wanna cracker?
Again, Benjamin, deposit insurance had absolutely nothing to do with the S&L crisis.
We have "hot deposits" now - they're called "brokered deposits" which are pedaled en masse by brokers to banks willing to pay high interest to fund asset growth. They are closely monitored by bank regulators and we are issuing Cease and Desist Orders.
Bill Seidman, the chairman of the FDIC from 1985 to 1991 (during the S&L crisis) was a disciple of Milton Friedman who frequently advised him. So you're saying one of his prize proteges was wasting his time?
Milton Friedman has said many things at many times in his life. He's made statements, changed his mind, and then changed it back based on situations.
You are taking his comments completely out of context. We are NOT in an unstable inflationary environment right now. If Uncle Milty had seen the exemplary resolution of the largest bank failures thus far, he'd be proud of what the FDIC has done. Despite the largest financial crisis since the Great Depression, the only significant bank run was caused by a loose-lipped Senator.
You make your statements as if you are an authority on Milton Friedman and as if he is the God of Economics.
I admire him as an economist and as a libertarian voice, but he is far from infallible. Even Albert Einstein went to his grave in denial of the Copenhagen Interpretation which is generally accepted by modern physicists.
Just a few posts ago you were celebrating inflation. How un-Friedman of you. Friedman knew what you do not: Inflation will kill banks dead and most of the money supply with it. According to Milton, that is the greatest threat we face.
From the clown who claims to be a libertarian: "From the very right-wing, free market Cato Institute"...
How to Label Cato
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