ARNOLD KLING
August 14, 2011
The Top Political Contributors
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Gender and the New Commanding Heights
August 11, 2011
Jamie Galbraith Makes an Assumption
August 11, 2011
Macroeconometrics: The Science of Hubris
August 10, 2011
Real and Nominal Bond Yields
BRYAN CAPLAN
August 14, 2011
The Effect of Thumb Sucking on Income
August 12, 2011
The Voice of Cold, Hard Truth to All Would-Be Educators
August 12, 2011
Ability, Morality, and Prosperity: A Paper and a Report
August 11, 2011
The Theory of Time and Frittering
August 10, 2011
Male Variance and the Remnants of the Gender Gap
DAVID HENDERSON
August 9, 2011
Hayek in "Unbroken", Part Two
August 8, 2011
Hayek in "Unbroken"
August 5, 2011
James Bovard on the Peace Corps
August 4, 2011
Summers Way Off on FDR and 1941
August 3, 2011
The "Amazon" Tax
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Maybe so, I've been hearing that for some time. But if so, it's nothing like Japan's bond bubble. When long bonds pay basically zero figure what happens to their value if rates rise a few points (maybe with the "inflation cure").
Rudy Dornbusch:
~~~
The second mega-risk scenario involves a Japanese financial meltdown... The ingredients are two: an economy that stubbornly refuses to turn up—and nobody having a clue of how to change that, and a financial superstructure that is out-and-out bankrupt. This is not just the banks and the insurance companies, and retailers and other parts of the private sector.
Importantly, the government is bankrupt. Its debt is larger than that of the US – a country much larger than Japan -- or that of all of Europe, again and economy much larger than Japan.
Japan’s finances are mostly stable as long as households wake up every morning and support the status quo by rolling the debt or buying even more in the mistaken belief that this is a plausible investment. Having lost on all their investments, it is not surprising that they hang on to their government’s liabilities as the last straw of hope; ironically, it is the least straw of hope.
One day there will be a creditors strike, the investors leave for foreign assets (just as any delinquent emerging market -- the currency crashes, the debt crashes, confidence falls and with it consumption. Japan will be overnight in the Great Depression.
And with Japan goes much of Asia and that means the world will have the single largest shock in 50 years. Far from bottled up in Japan, it will spread everywhere just as was the case in the 1930s...
~~
"Two Big Risks For the World Economy"
http://econ-www.mit.edu/faculty/dornbusch/editorials.htm
Surely this premium of nominal bonds relative to TIPS justs reflects people wanting to be insured against deflation, rather like the premium on deep out of the money put options?
D-squared, I think that TIPS dominate nominal bonds even if you are worried about deflation. I believe that TIPS are only indexed to go up with inflation, not go down with deflation.
Interesting indeed. Though I think that the claim of stochastic dominance is actually bit quickly made. In order to not have to specify a model of the entire forward yield curve (and thus abstracting from potential scenarios in which the reinvestment of the higher coupons on the plain bonds would more than compensate for the differential), he would have to be talking about a 10-year zero coupon bond versus a 10-year TIPS strip. Which is basically comparing a liquid security with an illiquid one, so I'm not so keen on this approach (although the general point that TIPS might be cheap seems appealing; there are certainly such things as bubbles).
This article, and its predecessor are relevant:
http://salsa.bbh.com/news/archives/000361.php?insurance=1