Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Wednesday, May 30, 2012

Plunging Yields

The nominal yields on "high-grade" government debt instruments continue to plunge; see here. Real interest rates on U.S. government debt are negative (I talk about real yields here).  It is a pretty bearish sign when the only thing investors appear to trust is the ability of (some) governments to service their debts.

The "flight to safety" phenomenon is a natural response by investors when uncertainty (along several dimensions) increases. Much of this uncertainty appears to be political in nature; even Mark Thoma appears to agree (of course, Mark blames the Republicans for this; as if only one side of a boxing match can be held responsible for inflicting harmful blows and counter punches.)

Although political uncertainty is almost surely playing a role in current events, one should not discount the role that political certainty can play. Greek youth, for example, appear certain that the governance of their country will remain hopelessly inept for the foreseeable future; and so many are flocking to other parts of Europe, including Germany. (Are the young reneging on their "obligation" to finance entitlements for the old?)
Not all that ails us has its roots in politics though. Personally, I think that the recent recession was associated with a significant "structural" shock that will take a long time to work out (see here). The U.S. unemployment remains elevated at 8.1%. People are eager to work (at well-paying jobs). At a Hyundai plant in Montgomery, Alabama, more than 20,000 have applied for one of the 877 job openings; see here. At the same time, employers appear to be having a hard time finding qualified workers in several occupations, including truck drivers, software developers, laborers, nurses, machinists, accountants, scientific researchers, administrative assistants, leisure and hospitality workers, and repair technicians; see here


  1. hmm, a study done by Manpower group who's job it is, coincidentally, to help employers find talented employees, based on a sample size (for the US) of about 1265 employers. Thank god they do this study each and every year to see where they need to focus their efforts.

    {btw that article is old based on Jan2011, new one here}

    How does difficulty filling positions track through time?
    2006 44%
    2007 41%
    2008 22%
    2009 19%
    2010 14%
    2011 52%
    2012 49%

    In other words, the data is cyclical: when the economy is growing and employers actually have positions, they employers report some difficulty filling them.

    Curiously, the 2006 talent survey said the top ten were: Sales Representatives, Engineers, Nurses, Technicians, Accountants, Administrative Assistants, Drivers, Call Center Operators, Machinists, Management/Executives.

    {truck drivers and drivers appears on the 2007 list along with laborers}. Theres a lot of overlap, maybe these are the positions Manpower Inc is uniquely qualified to help fill??

    Oh, what are their "strategies" for filling these vacant position? Call Manpower! no, seriously, they asked that too. For 2012 the strategies were:

    "Appointing people who do not have the requisite job skills but with the potential to grow." (36%, US)

    "Focusing on staff retention" (37%, uS%)

    "Broadening the job search beyond the local region" (28%)

    what - nobody offered higher starting salaries, whats up with that??

    in any economy in any given year there is a talent crunch, fortunately, Manpower is there to help!!

    ok, back to economics for a second. I learned in grad school that unemployment might have something to do with sticky prices or wages. If only i could find an example of a really big segment of the economy with really sticky (like, super duper sticky) prices, maybe that might explain it. Maybe, as the prices reach equilibrium, demand will return. hmm, let me think i think i read somewhere...

    1. what - nobody offered higher starting salaries, whats up with that?? kidding. Well, what can I say? Interesting material, as always, dwb.

      As for my own take on the stick price hypothesis, I'd be interested to hear your opinion on this piece I wrote some time ago:

    2. Your critique of the auction model of the economy focuses on "frictions" (e.g. labor isn't a commodity). But isn't a bigger problem with the auction model that it doesn't account for investment? If you have investment, then you have to account for unstable guesses about what other people are guessing that other people are guessing that other people are going to do...even a frictionless economy would be unstable unless expectations are exogenously manipulated.

    3. actually I agree with a lot of the things in that sticky price post.

      however is the elephant in the room is that during this recession, for 65 percent of americans, a large chunk their income is tied up in this 30 year contract for housing called a mortgage which is down wardly rigid.

      "mortgages as sticky prices" make a prediction as to when the housing market will begin to recover and when we should see demand return. I don't think that applies to previous recession except perhaps the ninety's recession.

      uncertainty: you're a spot on here but the wrong reasons. true story: I texted a friend of mine who runs a tech company last night. "qe3?" he asks. I told him dudley thinks the economy is fine. he said we're doomed.

      seriously , read beckworths worth post on the collapse of nominal expectations. business planners plan both quantity and price.

      the problem with inflation targeting is at any level of unemployment is consistent with any level of inflation.

      the problem with interest rates targeting is that we don't know what the natural rate of interest is.

      the uncertainty is a direct result of the policy trap we're in. what need is a fed policy committed to stabilizing the economy.... cue Sumner.

    4. I do speak english although its hard to tell from that post, ack. Something gets lost in the voice translation by Android.... like grammar!

    5. dwb,

      I understand most of what you are saying, don't worry!

      Yes, I think I have come around to the view that nominal debt may be an important source of nominal stickiness. Whether it can account for a decade-long recession, I'm not sure. But I can see how it could propagate the bad effects of a normal recession.

      Not sure what you meant about me being correct about uncertainty but for the wrong reasons.

      I read David and Scott's stuff all the time. I am still trying to absorb the theory and empirical evidence. I cannot shake the feeling that they may be getting the direction of causality reversed. I plan to write on this soon, using a formal model, to make clear where my concerns lie for the idea of NGDP targeting (as some sort of panacea).

    6. i love panaceas, if you've got any send them over. I like to put some eggs and sausage between my panaceas and make a little stack with syrup. what do panaceas have to do with economics though?

      "Not sure what you meant about me being correct about uncertainty but for the wrong reasons. "

      Regardless of what you think is correct about structural employment, i think you would agree there is an enormous amount of uncertainty about the macro picture and consequently an enormous amount of uncertainty about the Fed's reaction function (and: the consequences of the Fed over or under reacting).

      I think that what we need to reduce the uncertainty is a reaction function that performs well under large model uncertainty, including a large amount of uncertainty about the output gap.

      For example, one cannot judge the size of the output gap from the level of inflation (2.5% inflation is just as consistent with a large output gap as with a small and negative one). And unless you can tell me what the natural rate of interest is, you cannot judge whether policy is "accommodative" merely from interest rates (for example: mortgage debt is declining ~2%/yr, maybe the natural rate is a lot lower then people think just now).

  2. "Perhaps the biggest winners in the revived housing market are construction workers, particularly specialists. Framers, for example, are in high demand. Many left the state when the housing market deflated, and the ones who stayed took jobs in other fields. Now, homebuilders are entering bidding wars to hire those who are left."

    hmm, maybe its just those damn sticky prices. (ht: CalculatedRisk)

  3. It can't be "political uncertainty" since the interest rates are low in pretty much any economy outside EU. That is, unless you mean depressed economy and high rate of savings.

    These guys found that about 4 out of 6.2 million jobs lost are due lack of demand. Structural eh?

    1. CL, your first statement does not follow as a matter of logic. I meant political uncertainty over, say, who is going to get taxed. That spells disaster for investment, and will look like a lack of AD. However, there may be no uncertainty over the prospect of *somebody* getting taxed to finance debt repayment. That is why the demand for Treasuries is so high.

      And what's with the "eh?" Are you a Canuck too? I wonder sometimes whether people even know what they are talking about when they speak of "a lack of demand." Wtf does that mean? Among other things, does it mean that problems can be fixed simply by legislating the proper amount of "demand?"

    2. "I wonder sometimes whether people even know what they are talking about when they speak of "a lack of demand." Wtf does that mean? Among other things, does it mean that problems can be fixed simply by legislating the proper amount of "demand?""

      You seem pretty confused for someone with a responsible position. I would think you might increase demand by spending borrowed government money to pay people to do useful things, as we did in the GD or in WWII. But what do I know...

    3. "a lack of demand"

      Isn't that a state described by Keynes as:

      Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; — though fears of loss may have a basis no more reasonable than hopes of profit had before.

      What would Keynes say of our program trading, our 24/7 reporting of every new "vital sign."

      In such a world, are there any animal signs left?

      It seems to me that we should be asking, do present fears of loss have a basis more reasonable than hopes of profit, say when Bill Clinton was President?

      Now any sane observer would say yes, for as many have remarked, more is broken in our economy that just a shock of too few truck drivers.

      Now, being a great man, and having served for a truly Great Man, I subscribe to the great man theory.

      Today's news:

      President Barack Obama is putting increasing pressure on European officials to resolve the euro crisis, talking with the leaders of Germany, France and Italy to help lay the groundwork for action before a Group of 20 summit meeting to be held in June in Mexico.

      Given the disorder in his own house, if Obama did this it was an act of madness worthy of promising to make his horse a consul.

      Last I looked all the governments in Europe are democracies and surely, by now, we have learned that you don't order but instead obtain the consent of the governed.

      When our master politician lacks the political skills of a former dry wall hanger, perhaps it is time to be honest.

      We remain in our present circumstances do to an employment shock, but not the one David mentioned in his last post--our employment shock is that those in government are singularly unqualified, put the applicants to take their places are worse, wholly lacking in any skills whatsoever.

    4. Apparently quite little, eric, if you think that "demand" is a well-specified concept, even moreso the idea of a "lack of demand". Neither one means anything in general equilibrium.

    5. "Among other things, does it mean that problems can be fixed simply by legislating the proper amount of "demand?"

      Well, i hope not, but with treasury yields at 1.6% and an earmark ban for several years, you know those legislators are eager to bring home the bacon to get re-elected. Pork is best served on the BBQ, not in Congress. I really really hope those FOMC guys help us out of this policy trap before Europe gioves people an excuse to take Krugman's advice and spend the $$ on ARRA 2.0 in time for the election.

    6. voters fear unemployment more than big government and vote for action over inaction.

      All we need now is some bright eyed Keynesian economist to tell them that they can legislate demand and 10 year treasuries are only 1.57%. oh wait...

      "Rep. Michele Bachmann (R-Minn.), founder of the Tea Party Caucus, has said earmarks shouldn’t count when they’re for transportation projects. And just last week, the Transportation panel’s top Democrat, Nick Rahall of West Virginia, made a public plea that Chairman John Mica (R-Fla.) join him in writing a letter asking Boehner to bring back earmarks."

      my projects are an investment but your projects are wasteful. Thank god my projects are so much better than yours that we can do both and still come out ahead!

  4. "of course, Mark blames the Republicans for this; as if only one side of a boxing match can be held responsible for inflicting harmful blows and counter punches."

    Unfortunately for you, this is the case. Objectively. Remember who said his number one job was to work against Obama, and then went out to do so in the past 2 years? Remember who held the debt ceiling hostage, leading to a serious downgrade in confidence and rating of the US (and you know the economy soured after these exercises)? Remember who wants austerity now-now-now (and see how it's working in Europe)? Remember who really does not want stimulus and a focus on jobs? I could go on for a long time. There's really nothing even close at the other side of the aisle.

    And economic governance should not be about a boxing match, that's really part of the problem, one that is mostly performed by that same side. A boxing match is about winning the match, so strong punches are a good thing. However a KO of the economy by a political party should not be considered a win (as the TP clearly thinks), it should be considered the height of unresponsibility.

    1. Unfortunately for me? Not sure what you meant by that. And yes, if that's the way you see it, that's the way you see it. Amazing how ignorant the other side is, no?

  5. @DA: "At the same time, employers appear to be having a hard time finding qualified workers in several occupations, including truck drivers, software developers, laborers, nurses, machinists, accountants, scientific researchers, administrative assistants, leisure and hospitality workers, and repair technicians; see here."

    Your evidence for this is a slideshow from a TV station? Are you serious? I'm not an economist, but I would expect something more--something like what dwb provided in his first comment. Your assertion strikes me as absurd on its face--as if we're suffering 8% unemployment because an economy that's barely bigger than it was five years ago can't find enough truck drivers or "leisure and hospitality workers"?! All because a TV station made a slideshow saying so? Please.

  6. This comment has been removed by the author.

    1. Too bad you didn't delete the rest of your dimwitted comments, John D. Yep, I spotted you again. You're like a retarded version of Waldo who hides by wearing luminescent shirts and carrying a ten-foot-tall flagpole.

  7. David,

    BTW, your comments above also so why Hayek and all the nutty libertarians are so wrong.

    Property rights at the zero bound are meaningless. What matters is whether future promises will be honored. As you so wisely point out, we know that someone will pay the taxes.

    The fact that the Bond Market is still working is also an immense testament to the wisdom of Hamilton, who understood that a working bond market was a rock solid foundation on which to build prosperity and hence that government debt is a good thing.

    Where would we be if we had no government debt and no place for all the funds seeking safe assets to go?

    1. In answer to your last question, sure. I can see a legitimate role for government debt. Woodford wrote about this in the 1980s. However, on the other side, you might want to look at this interesting piece by John Bryant:

    2. What about my first question? Haven't you shown that Hayek was wrong, that what is important is the enforceability of future promises not property.

    3. Alexander Hamilton does not seem to understand that property rights is a vague term that necessarily includes the enforcement of contracts (including those that are promises to future stuff). You're not really in the same intellectual league as the guys who's name you've stolen, bub.

    4. Sorry, but I understand that Hayek is Bullshit, as is your response.

      Hayek's bullshit is that, if only we had no government. Sorry, but only government can enforce future promises. It may not choose to do such, which is a second rub, but, as between private parties, government (in some 3rd party form) is necessary to enforce future promises.

    5. John D, your reading comprehension needs work. I suggest something suited to your intellectual maturity level, such as "Everyone Poops."

  8. David

    BTW, Toma is right about the Republicans being the cause. Here is a nice chart

    1. If the Democrats had simply capitulated to Republican demands, there would not have been this problem. I am not saying they should have capitulated. But clearly, they are combatants and therefore partly responsible. I'm not sure why people want to argue this obvious point. They are politicians, for crying out loud. That's what they do. Always.

    2. David

      You are just as wrong as rain on this one.

      Had the Democrats capitulated the Republicans would have changed their demands and they would have kept on changing their demands until the Democrats could no longer capitulate.

      This is the pattern of all extortionists. You should have learned the lesson at school studying Hitler, who was a classic extortionist.

      Or, you could have learned the lesson by watching Perry Mason. Many of the victims were extortionists, shot when the victim decided to stop capitulating to ever growing demands.

      Once you are dealing with immorality and dishonesty at the core of today's GOP, a group so immoral that they will engage extortion, you are going to have conflict.

      This is especially true when you have people as stupid as Obama running the country. He was so stupid that they did not repeal the debt ceiling laws when they had the votes.

      How simple minded do you have to be not to have foreseen that, if you didn't repeal the law, what happened wasn't going to happen?

      Look at what Romey was saying this week. We can't cut the budget in 2013. He knows his Presidency is going to be over virtually before he is sworn in. The GOP is going to slash spending and stop borrowing and employment is going to fall and we are going to have a new depression. Obama can only see far enough ahead to plan his next golf outing.

      The only way he is able to get to the Course is to follow the highway signs Warren has put out in her campaign trying to find her "missing" Indian relatives, you know, the ones reading "Watch for Falling Rock."

      When this is all said a done, Obama's failures as a leader will be the subject of millions of papers by Chinese students.

  9. When Alexander Hamilton becomes partisan it really makes you think...

    If only this could be solved by a duel...

  10. "But clearly, they are combatants and therefore partly responsible. I'm not sure why people want to argue this obvious point. "

    Good question. What are you and many others missing?

    For one, there appears to be a good degree of 'racial animus' driving US politics these days. Much of that attitude seems to come from the Republican side of the partisan fence.

  11. @DA

    There has been considerable anecdotal evidence of matching problems in the labor market in the US, UK and Canada. Of course, the plural of anecdote is not data. If you have data, please post some links, as I would love to see it.

    Thanks, anon212

  12. Sorry, previous post should have been "@ Eric", not "@DA". Though if DA has data, I would also like to see it! :)


    "An estimated 600,000 skilled, middle-class manufacturing jobs remain unfilled nationwide, even as millions of Americans search for work"


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