Surprising Economic Fact of the Day

Posted by: Michael Mandel on June 26

Today the 10 year Treasury rate hit 5.23%, exactly where it was the day after George Bush’s inauguration in January 2001. That is, the federal budget went from $5.6 trillion in surplus (measured on a 10-year time horizon) to $800 billion in deficit, without any noticeable impact on long rates.

Now, be honest. Suppose in 2001 I would have told you these true facts about the next five years:
—the shift in the federal budget from surplus to deficit.
—the very sharp rise in oil prices and the doubling of overall commodity prices
—the strong growth of the global economy (4.0% average from 2000-2005, compared to 3.9% from 1995-2000)
—today’s low unemployment rate (4.6%, compared to 4.2% in January 2001)

If I had told you these facts in January 2001, would you have predicted that long-term interest rates would be no higher in June 2006?


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Reader Comments

Wes

June 27, 2006 12:41 PM

Interest rates aside, I would have thought you were nuts if you had told me those things in 2001.

At least three of the four factors are directly related to low interest rates that were manipulated by the gov't, else the surplus to shortage shift and effect on rates would have been different.

1) The gov't can borrow more when it costs less.
2) People can borrow more when it costs less (i.e. large SUVs using more gas, driving up demand for gasoline)
3) U.S. economy built largely on people buying and selling homes to each other due to low interest rates.

Lord

June 27, 2006 02:48 PM

Now if you told us China would hoard vast amounts of dollars, it would have been self-explanitory.

Nathan

June 28, 2006 08:04 PM

Wes,

You're missing the point and also please explain how the US gov't "manipulated" the rate lower? And I'll give you a hint, any explanation that starts with Alan Greenspan lowering the Fed Funds Rate is wrong.

Mike Donnelly

July 18, 2006 05:15 PM

Agreed but...no one seriously believed in the 5.6 trillion surplus


A) "--the shift in the federal budget from surplus to deficit. "

but a massive contraction in duration, 1/3 of the Federal Debt is now in 1 year bonds. This contraction of supply at the long end caused competition for the now very limited number of 10 year T bonds issued, driving the yield down.


B) "--the very sharp rise in oil prices and the doubling of overall commodity prices"


Yes but sharp rise in oil prices meant the OPEC nations were awash in money (global glut of savings) and they reinvested much of the proceeds in the US market, driving down the yield.


C) "--the strong growth of the global economy (4.0% average from 2000-2005, compared to 3.9% from 1995-2000)"


? A tenth of a percent is not a big deal


D) "--today's low unemployment rate (4.6%, compared to 4.2% in January 2001)"

? Again as above, similiar conditions should result in similiar rates

Long term rates are unbelievably low, but the combination of a flood of savings around the world (China, Japan and OPEC) moving the supply curve combined with a massive contraction in the Demand curve has been able offset the underlying economic conditions.


If I were Treasury secretary I would issue nothing but 30 year and 100 year bonds to take advantage of these favorable conditions.

Mike Donnelly
Chief Economist
PBP

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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