Wednesday, 3 December 2008

Bernanke has lost control of the ship

This is the kind of chart that sends economies into recession. It tracks the US corporate bond yield for non investment grade paper (rated Baa by Moody's). Companies issuing this kind of paper normally carry some risk of default but they are also often the most innovative rapidly growing companies.

Unfortunately, non investment grade US corporate bond yields have surged. In fact they hovering at around 9 percent. This is at a time when the Federal Funds rate is just one percent.

If this rate does not fall, companies will not be able to raise cash through the corporate debt market. These companies will forego investment projects, and the growth potential of the US economy will decline.

So much for Bernanke's dash for zero interest rates. The rest of the economy has decided to stay put and keep rates high. It all goes to prove one thing, Bernanke and the Fed have lost control. US monetary policy isn't working.


Nick von Mises said...

Good chart but I think it would be more appropriate (and dramatic) to plot is as the spread over the Fed rate (or Treasuries, or both) rather than the gross %.

Remember from a business risk POV we are essentially asking "how much do investors require to come out of hiding"?

Chris said...

What US monetary policy are you talking about? Paulson doesn't have one (other than flailing your arms and running around?) and I don't think the Bene-copter (aka Fed Reserve Chief Bernanke) does either.

Anonymous said...


Good suggestion re: spreads. I might do it sometime this week.


Nick von Mises said...

BTW, Mish has been saying for over a year now (with me parroting it) that the last bubble to burst is the belief that the Fed has any control over the economy anyway.