I discussed how the insistence of mainstream macroeconomics that monetary policy should dominate the counter-stabilisation function and concentrate on maintaining low inflation with discretionary fiscal policy eschewed and biased towards running surpluses has increasingly undermined the business model of investment banks, and pension and insurance funds.<\/p>\n
I also provided examples of the way that the framework that mainstream macroeconomics use to link policy choices by government to a range of aggregates, which form the basis of private sector investment decisions, has no evidence base to support the predictions that flow from it.<\/p>\n
A notable example is the famous ‘widow maker’ investments, which have resulted in sustained losses over several decades.<\/p>\n
Many self-confident bond investors have tried to make money by short-selling long-term Japanese government bonds.<\/p>\n
They thought that with fiscal deficits high and the Bank of Japan buying most if not all the debt being issued by the government, that government bond yields would rise because investors would demand an increasing risk premium and that inflation would accelerate because, in their language, the Bank of Japan was increasingly ‘printing’ money.<\/p>\n
This just reflected core New Keynesian analysis that is taught around the world in our universities.<\/p>\n
The investors who were confident that their short positions would allow them to buy bonds cheaper when forward contracts matured and generate profits, failed to realise that the Bank of Japan could control all yields and interest rates and was able to maintain both close to zero.<\/p>\n
As a result, the trades failed.<\/p>\n
The culprit – erroneous economic theory and unquestioning financial market actors.<\/p>\n
A similar dynamic played out during the Global Financial Crisis (GFC) when financial investors, fearing capital losses on government bonds, as fiscal deficits in around the world reached new heights, were encouraged by economists to eschew long positions in government debt.<\/p>\n
Economists also predicted rising inflation from the QE programs that central banks embarked on, which encouraged investors to move into assets such as real estate as an inflation hedge.<\/p>\n
Neither prediction was realised and as a result significant profits were foregone because of the faulty advice emanating from mainstream macroeconomics.<\/p>\n
Flattening the curve …<\/h2>\n
I recently wrote a UK Guardian Op Ed article (June 7, 2021) – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman<\/a>.<\/p>\n I followed it with this blog post – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman<\/a> (June 9, 2021).<\/p>\n My contention was that once the game was up on mainstream claims that currency-issuing governments would be running out ‘money’ any time soon, which had been the dominant obsession in the public debate since the GFC, the only scarey thing these characters could inflict on the public debate was the inflation bogey.<\/p>\n It must be hard being a mainstream macroeconomist.<\/p>\n They have created such a sterile framework that never seems to predict anything that occurs.<\/p>\n They then have to twist and turn to keep a straight face – this ad hoc<\/em> anomaly, or that – this special case or another, whatever, they always manage to weasel their way out of reality that their framework is anti-knowledge.<\/p>\n They are Pavlovian in nature.<\/p>\n Trigger this, and predict that.<\/p>\n No nuance until the predictions fail and then it is all nuance or denial that the facts are the facts.<\/p>\n Mainstream economists have been seeing relatively large fiscal deficits and central bank asset purchasing programs and the only thing their defective model says about that sort of conjunction is rising interest rates and bond yields and inflation.<\/p>\n They cannot ‘understand’ the world in any other way.<\/p>\n So their only ‘contribution’ is to scream ‘rising inflation’ and ‘rising bond yields’.<\/p>\n They then go further and claim that the ‘rising bond yields’ (as if they are an inevitability) signal that governments are going to run into problems funding their spending – and all the rest of it.<\/p>\n It is like a ridiculous circle of logic, with each step based on nonsensical ideas.<\/p>\n But at present the inflation narrative is all they have had to maintain a face in the public commentary.<\/p>\n More recently, I wrote this blog post – Rising prices equal an inflation outbreak (apparently) but then the prices start falling again<\/a> (June 21, 2021).<\/p>\n I initially noted how the long-term bond yields were falling, which ran counter to the inflation-about-to-accelerate narrative.<\/p>\n I had appeared as a after-dinner speaker at a financial markets conference in Sydney in early June (before the COVID chaos started in Sydney again) and asked the audience: If the US economy was overheating and inflation was about to break out then why would long-term US bond yields be falling recently.<\/p>\n It seems that the downward movements have continued.<\/p>\n Have a look at the history of the US 10-year Treasury bond yields since the beginning of 2021.<\/p>\n You can get for all available maturities from the US Department of Treasury’s site – Daily Treasury Yield Curve Rates<\/a>.<\/p>\n As the economy started to opened up a bit in February and sentiment improved, investors started to diversify their portfolios away from the risk-free Treasury bonds and yields rose a little.<\/p>\n Since mid-March, yields have flattened and are now falling.<\/p>\n Another way of looking at this is shown in the next graph.<\/p>\n You can see that over June (compare the thicker red and blue lines) then into July (green line), the yield curve has flattened<\/strong> rather than steepened.<\/p>\n![\"\"](\"https:\/\/billmitchell.org\/blog\/wp-content\/uploads\/2021\/07\/US_10yr_Yield_January_2021_July_9_2021.jpg\")
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![\"\"](\"https:\/\/billmitchell.org\/blog\/wp-content\/uploads\/2021\/07\/US_treasury_bill_yields_2021_July_9_2021.jpg\")
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