For Bonds, This Time is Different
JUNE 2, 2014
Bloomberg has an interesting piece on how high bond prices and low yields have been shocking investors who relied on old models.
Some of this, I suspect, is because many people still — after all these years — haven’t wrapped their minds around the implications of a zero-lower = bound economy and the risks of a low-inflation trap.
But it’s also true that structural change is happening fast— just not the kind of structural change people like to talk about. Never mind the stuff about skill mismatches and all that.
What’s really happening fast is the demographic transition, with Europe very quickly turning Japanese:
And the US, although growing faster, also turning down sharply.
Add to this the fact that what we thought was normal actually depended on ever-growing household debt, and it becomes clear that historical expectations about normal interest rates are likely to be way off.
You don’t have to believe in secular stagnation (although you should take it very seriously) to accept that low rates are very likely the new normal.
Link: http://krugman.blogs.nytimes.com/2014/06/02/for-bonds-this-time-is-different/?emc=edit_ty_20140602&nl=opinion&nlid=59725256
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