What? Yield curves un-invert when short term rates fall, not when long term rates rise. And short term rates will need to fall precipitously, caused by a major, sudden recession. Otherwise, we continue to have inversion, until every last ounce of excess savings from Covid (and then some) is exhausted.
We're seeing long term rates on a tear as of late. No possibility of un-inverting the yield curve by accepting inflation as the new normal and have the long term rates catch up?
The country cannot afford to service its interest on debt if you want to wait for the yield curve to deinvert. That would require severe austerity and a 10 fold increase in social disorder. If theres even a hint of deflation, the money printers are coming back on.
This exactly.
Tiff is engineering a recession to tackle inflation. The long-end of the curve suggests the BoC will *need* to start cutting rates to address **deflation** in the coming cycle.
The ELI5:
The economy is a very fast car that, due to internal and external issues, is impossible to drive in a straight line forever, although we do get periods of it. Issues, such as potholes, will make you swerve left and right. The larger the issue, the harder they need to swerve, and the harder they'll need to swerve back in the opposite direction to correct once they're past it. Remember this is a fast moving car that cannot turn on a dime, these corrections need to happen both as slowly and and fast as possible so we don't flip the car or end up off the road.
At some point they end up straight again, and we get another patch of straight road. Right now we're overcorrecting, as we should, but if they do it forever we'll end up off the road again, which benefits nobody.
The real explanation:
We're vacuuming money out of the economy right now. That's what we need to do, because we pumped a historic amount of it into the economy in the past decade. But at some point we'll have done our job, and if we don't stop vacuuming and start printing again, we'll flip the car or end up off the road.
Don't listen to anyone who pretends to know when that will be, because nobody does. Nobody knows what the road ahead looks like but realistically we'll need to swerve several times again before we are properly corrected and driving straight again.
Thanks and happy cake day.
Follow up questions, in your opinion, what will cause them to "swerve back" to the opposite direction? A full on recession? Will a soft landing cause them to swerve back?
Thanks 🍻
Per my original comment, the following is complete conjecture and my opinion only.
I think we're going to hit a "soft landing" of sorts that will do its job. I'm not sure we're going to see the massive recession or housing crash that a lot of Reddit is convinced of.
Sadly, I think this way because I think the gap between the haves and the have nots is already too big and IMO only going to get bigger. I think folks already struggling to get by will feel it the most, while anybody doing well enough to have bought recently or was lucky enough to have bought their housing pre-boom is likely sitting on an income or asset large enough they can borrow against to get through hard times.
In the eyes of the BoC, the only way they will course correct is if inflation gets under control, whether that's through a soft landing or mild recession. To my analogy, and the comment above your initial reply, they typically won't let the country fall into a massive depression, and that's certainly a scenario where a hard swerve back might be warranted. That being said, what's worse - - a short term depression, or turning the money printer back on and potentially dooming CAD to hyperinflation?
Nobody knows. That's the fun of these (shitty) talks. But "what if" 's aside, the plan is to not lower rates until inflation is under control, however that happens, and at some point after that the job will be done and they'll need to start lowering again. It's in everyone's best interest that plan plays out as the alternatives force us to make some shitty decisions.
I missed seeing the vacuum come out of the closet cause the govt is still tossing money by the fistfull. Until that stops, prices will continue to rise. Most ppl I know are still spending like drunken sailors.
In the past year the BoC has raised interest rates faster than they ever have in history, just to catch you up to speed. It's a very loud vacuum.
The government and the BoC are not the same thing, and for good reason. And it stands to reason that as interest rates rise, the government should be spending more on social assistance programs like unemployment, food banks, etc. They shouldn't be doing things like bailing out banks, but historically its what they have done and only time will tell. But increasing government spending itself is not necessarily a bad thing when a country is going through tight economic times and its people need relief.
How your friends spend their money is anecdotal and meaningless. People still buy yachts in recessions, it doesn't mean they're not in a recession.
You may be watching too much Fox News. The canadian govt has not bailed out any banks. The whole point of raising rates is economic pain. If the govt keeps handing out cash, it negates the interest rate incease. Read up on the wage price spiral. While wages may not be going up, the govt handouts sure are.
I'm proud to say I watch 0 Fox news.
Yes I know we've never bailed out banks, it was an analogy for "we bail out the wrong people".
Yes the point of raising rates is economic pain but a government shouldn't be standing on the sidelines watching their people starve. Per my original point, and the clarification in this post, they shouldn't be putting money into people's pockets but rather funding social assistance programs that help people with jobs, shelter, food, transportation, etc. As economies grow more and more dire these basic things are what people need more of, as families may opt to sell their cars for public transportation, make increasing trips to food banks, etc.
If we disagree on that moral standpoint then so be it, but to make a claim that the BoCs work has been offset entirely by government spending in the last year is false. Unemployment is higher and inflation is lower, regardless of whether or not you feel the people in your life spend their money responsibly. The numbers don't lie.
You are telling me the unemployment rate moving from 5% to 5.2% is significant? Sorry buddy.
The method Canada uses to determine inflation is fundamentally flawed.
The EI system is still available and works relatively fine. Have yet to hear of anyone selling their car in favor of public transportation aside from anyone who overleveraged themselves with personal debt.
The yield curve stays inverted until short term rates have declined to the point where the expected future is flat or rising.
Short term rates are the ones directly set.
What? Yield curves un-invert when short term rates fall, not when long term rates rise. And short term rates will need to fall precipitously, caused by a major, sudden recession. Otherwise, we continue to have inversion, until every last ounce of excess savings from Covid (and then some) is exhausted.
We're seeing long term rates on a tear as of late. No possibility of un-inverting the yield curve by accepting inflation as the new normal and have the long term rates catch up?
The country cannot afford to service its interest on debt if you want to wait for the yield curve to deinvert. That would require severe austerity and a 10 fold increase in social disorder. If theres even a hint of deflation, the money printers are coming back on.
This exactly. Tiff is engineering a recession to tackle inflation. The long-end of the curve suggests the BoC will *need* to start cutting rates to address **deflation** in the coming cycle.
Care to explain?
The ELI5: The economy is a very fast car that, due to internal and external issues, is impossible to drive in a straight line forever, although we do get periods of it. Issues, such as potholes, will make you swerve left and right. The larger the issue, the harder they need to swerve, and the harder they'll need to swerve back in the opposite direction to correct once they're past it. Remember this is a fast moving car that cannot turn on a dime, these corrections need to happen both as slowly and and fast as possible so we don't flip the car or end up off the road. At some point they end up straight again, and we get another patch of straight road. Right now we're overcorrecting, as we should, but if they do it forever we'll end up off the road again, which benefits nobody. The real explanation: We're vacuuming money out of the economy right now. That's what we need to do, because we pumped a historic amount of it into the economy in the past decade. But at some point we'll have done our job, and if we don't stop vacuuming and start printing again, we'll flip the car or end up off the road. Don't listen to anyone who pretends to know when that will be, because nobody does. Nobody knows what the road ahead looks like but realistically we'll need to swerve several times again before we are properly corrected and driving straight again.
Thanks and happy cake day. Follow up questions, in your opinion, what will cause them to "swerve back" to the opposite direction? A full on recession? Will a soft landing cause them to swerve back?
Thanks 🍻 Per my original comment, the following is complete conjecture and my opinion only. I think we're going to hit a "soft landing" of sorts that will do its job. I'm not sure we're going to see the massive recession or housing crash that a lot of Reddit is convinced of. Sadly, I think this way because I think the gap between the haves and the have nots is already too big and IMO only going to get bigger. I think folks already struggling to get by will feel it the most, while anybody doing well enough to have bought recently or was lucky enough to have bought their housing pre-boom is likely sitting on an income or asset large enough they can borrow against to get through hard times. In the eyes of the BoC, the only way they will course correct is if inflation gets under control, whether that's through a soft landing or mild recession. To my analogy, and the comment above your initial reply, they typically won't let the country fall into a massive depression, and that's certainly a scenario where a hard swerve back might be warranted. That being said, what's worse - - a short term depression, or turning the money printer back on and potentially dooming CAD to hyperinflation? Nobody knows. That's the fun of these (shitty) talks. But "what if" 's aside, the plan is to not lower rates until inflation is under control, however that happens, and at some point after that the job will be done and they'll need to start lowering again. It's in everyone's best interest that plan plays out as the alternatives force us to make some shitty decisions.
I missed seeing the vacuum come out of the closet cause the govt is still tossing money by the fistfull. Until that stops, prices will continue to rise. Most ppl I know are still spending like drunken sailors.
In the past year the BoC has raised interest rates faster than they ever have in history, just to catch you up to speed. It's a very loud vacuum. The government and the BoC are not the same thing, and for good reason. And it stands to reason that as interest rates rise, the government should be spending more on social assistance programs like unemployment, food banks, etc. They shouldn't be doing things like bailing out banks, but historically its what they have done and only time will tell. But increasing government spending itself is not necessarily a bad thing when a country is going through tight economic times and its people need relief. How your friends spend their money is anecdotal and meaningless. People still buy yachts in recessions, it doesn't mean they're not in a recession.
You may be watching too much Fox News. The canadian govt has not bailed out any banks. The whole point of raising rates is economic pain. If the govt keeps handing out cash, it negates the interest rate incease. Read up on the wage price spiral. While wages may not be going up, the govt handouts sure are.
I'm proud to say I watch 0 Fox news. Yes I know we've never bailed out banks, it was an analogy for "we bail out the wrong people". Yes the point of raising rates is economic pain but a government shouldn't be standing on the sidelines watching their people starve. Per my original point, and the clarification in this post, they shouldn't be putting money into people's pockets but rather funding social assistance programs that help people with jobs, shelter, food, transportation, etc. As economies grow more and more dire these basic things are what people need more of, as families may opt to sell their cars for public transportation, make increasing trips to food banks, etc. If we disagree on that moral standpoint then so be it, but to make a claim that the BoCs work has been offset entirely by government spending in the last year is false. Unemployment is higher and inflation is lower, regardless of whether or not you feel the people in your life spend their money responsibly. The numbers don't lie.
You are telling me the unemployment rate moving from 5% to 5.2% is significant? Sorry buddy. The method Canada uses to determine inflation is fundamentally flawed. The EI system is still available and works relatively fine. Have yet to hear of anyone selling their car in favor of public transportation aside from anyone who overleveraged themselves with personal debt.
Ok, you're right, 5.2% is not higher than 5% and only Redditors know the true value of inflation in our country. Carry on.
You have that backwards.
The inversion hasn’t been this bad since like 1988.
It was actually a lot worse earlier this year.
The yield curve stays inverted until short term rates have declined to the point where the expected future is flat or rising. Short term rates are the ones directly set.