[ExI] M0 singularity... you're soaking in it

Gordon Swobe gts_2000 at yahoo.com
Mon Jan 26 02:21:14 UTC 2009

The article at the following link describes the treasury inflation-protected yield spread (TIPS spread) that I mentioned in an earlier post. As one can see from the chart, according to this indicator inflation expectations fell dramatically from about 2.6% to nearly 0% (.13%) as the financial crisis unfolded. 

Before the crisis treasury investors demanded about 2.6% in extra yield as compensation for bearing inflation risk. After the crisis they demanded only about .13% -- basically no compensation at all. 


If the efficient market hypothesis holds for these markets; in other words, if current prices for these two classes of treasury bonds fully discount all available public information about the global economy, then we ought not feel very concerned about inflation. It would seem the efficient market disagrees vehemently with Adam Hamilton's hyperinflation thesis.

One could however consider an alternate explanation for the unusual near parity between ordinary treasury yields and inflation-protected treasury yields: perhaps only the huge market for ordinary treasuries can support the current high demand for liquidity, i.e., perhaps governments and large institutions, in their rush to safety and liquidity, cannot buy super-safe inflation-protected treasuries in large quantities without unduly affecting market prices. Such conditions would encourage large investors to buy the more volatile ordinary treasuries instead, and possibly explain the narrow TIPS spread. In that case the narrow spread might indicate increased fear of defaults and increased demand for liquidity as much or more than it does decreased inflation expectations. 

But even in that case: in a world headed toward depression, fear of defaults, demand for liquidity, and deflation/disinflation expectations should all correlate positively. It seems to me that the TIPS spread argues against hyperinflation no matter the interpretation.



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