Reply To: Long term rates and the yield curve


Thanks for linking the paper, but it has caused more questions than answers.

1. “Yet virtually everyone would agree that the banks have much more control over short-term than long-term rates, so “the” interest rate in the standard
exposition of ABCT should be interpreted as short rates.” (31-32)

A. Why must this be so? Why does the Fed’s credit expansion only push down short-term rates? Why aren’t long-term rates affected by this (why isn’t there downward pressure on long-term rates)?

B. Does QE affect long-term rates?

C. If conventional monetary policy (Fed Funds Rate) does not put much or any downward pressure on long-term rates, how does a bubble form? Aren’t mortgages and commercial loans typically long-term loans?

2. “A third—and far more speculative—observation is that Austrians may be able to explain periods such as the early 1980s and again the early 1990s when short-term rates (the blue line) spiked, and yet no recession ensued. What is interesting in these two periods is that long rates spiked just as much, keeping the term spread intact. It is possible that these shifts upward of the entire yield curve were due to more fundamental changes in savings behavior, rather than bank policy. In that case, it makes sense that the spike in short-term rates did not lead to a recession, as it so often does at other times in the period surveyed.” (33)

A. Why do higher long-term rates not cause a recession?

B. If long-term and short-term rates are going up (causing the spread to stay the same), how come that does not cause a recession as well? It makes sense that credit expansion is still going on, but if rates go up, doesn’t that make a lot of these projects unprofitable?

I know this is a lot to answer, but I appreciate the responses! Let me know if I need to clarify my questions.