Why are bond yields in a 30 year bear market?

I think it all started with the Volcker Disinflation. The thing to remember is that they were in a 30 year bull market prior to that.

I think there’s a feeling among monetary and fiscal authorities of “never again.”

Remember during Clinton’s term where after meeting with Greenspan he was talked into not doing anything that would upset the phantom bond vigilantes?

Overall, there may have been other factors but I don’t think it was an accident.

Though I’m a skeptic of him, Sumner did recently make an interesting point that while we see a 7% yield in a euro coutries bond as a nightmare scenario, historically a 7% yield is not so high.

A few years ago most countries had yileds that level and it wasn’t considered an emergency. Indeed in the 70s that would have been a thing of envy.

Sumner’s explanation is predictable-the reason a 7% yield is unsustainable in the ero countries today is because of flagging or negative NGDP

Over the years, power has shifted in favour or capitalists. In the early 70s and before, workers had higher negotiating power and the rising power led to fast rise in wages which led to accelerating/spiralling inflation.

Near that time, there was near full employment and the Monetarists started hypothesizing the NAIRU nonsense and according to it, the accelerating inflation was due to near full employment rather than due to rising costs. As usual neoclassical economists went wrong.

Instead of recognizing the problem, the Monetarists completely missed the point and also started saying inflation was due to central bankers’ incompetence: not being able to control the money stock. The Monetarist experiments of the late 70s/early 80s completely killed trade union militancy by deflating demand to the point that the resulting high unemployment significantly reduced the bargaining power of workers. Governments liked it because it gave them a smoke screen to take powers from union leaders.

So after that wages have not risen as fast and capitalists got to have a higher share of the national income. So a slower rise in wages has resulted in slower price rise and meanwhile frequent periods of deflation (due to tighter fiscal policy) have resulted in low short term rates which the long term rates follow because long term rates are partly explained by the expectations hypothesis.

Even in periods of no deflation, inflation is low due to all this.

Opening of trade also leads to a bit of cost reduction because firms try hard to compete with foreign firms. So there’s “Death by Renminbi” in the United States.

Also, long term rates are also explained by the “market segmentation theory” or the “preferred habitat theory”. The United States enjoys have its currency as the reserve currency of the world and foreigners have a high portfolio preference for US Treasuries and this also is responsible for low long term yields.

Mike: “The forces propelling bond yields lower over 30 years must be extremely powerful.”

JMK: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

Dan: ” it was also a huge psychological victory for capitalism at the expense of socialism.”

That and more. It eliminated the only major competitor. Until then the West had to take socialism into account as a possible alternative so capitalists had to co-opt workers. I remember thinking as the Berlin Wall came down that this would be the result that would develop. The gears had already shifted, e.g., with the breaking of union power and it was only a matter of time before a more aggressive approach would be taken. Right now, the thinking of TPTB is TINA — workers really have no where else to go but to accept the great leveling as Western wages and benefits fall to meet rising wages and benefits in the emerging world, and there is still a whole underdeveloped world waiting in the wings, while technological innovation threatens to reduce the need for human labor, too. Where this trend is leading is yet unclear.

We buried Henry Ford’s wisdom.

Going on over 30 years now, we have shifted production income share from wages to corporate savings; drivers being market saturations (supply coming to exceed demand), off-shoring and outsourcing, automation, and social-political change favoring the capitalist class over the labor class. The shift has caused a growing imbalance in relative supply (increasing) and demand (decreasing). Mitigating factors were the return of women to the workforce and household debt accumulation – with occasional and temporary exceptions, those moderating measures have now been spent. Mitigation of the trend has come also from central govt spending, but is increasingly being limited or forgone as a result of the social-political environment devaluing govt expenditures.

With occasional periods of exceptions, the longer-term of aggregate demand decreasing relative to supply is limiting pressure for corporations to invest in expanding production. Exceptions tend to be measures to gain market share by cannibalizing share of other producers, however the usual increased productivity further weakens wage growth, and in turn, aggregated demand relative to supply.

Combining the lack of investment opportunity (again, derived from stagnant wages and in turn growing imbalance in supply and demand) with related growing economic uncertainties, private savings has been increasingly seeking safe return in govt issued bonds driving rates down in a long-term trend without any change on the horizon.

Select EZ exceptions to higher rates are only temporary reactionary parts of the process of the longer term trend. The trend cannot be reversed until broadly recognized and widely accepted conventional wisdom driving the 30+ year social/political trend is thoroughly rejected. I don’t see that on the horizon.

Agree with Bob Salsa and Ramanan. Supply-side is in the driving seat from early 1980s. Decrease in Real wages forced workers to take on more debt to maintain purchasing power. Both Fiscal (lower taxes) and Monetary policies (easy credit) boosting this to the extreme level resulting in yields falling at an increasing rate.

With the present conditions only this can only be reversed by increasing real wages. Another way is innovations that require specific workers skills that cannot be outsourced and demand higher wages. This puts pressure on corporations to invest in workers (higher wages) to increase production. This is ironic but unless profit margins don’t drop wages will not go higher.

With current policies in place corporations have no desire in investing because thier profits are already higher. FED is helping corporations by letting them speculate and inflate their financial assets. As a result corporations have lot of “cash” on their balance sheets.

Fiscal policy should be to help create new innovations and focus less on saving banks or create new welfare programs. Govt must discourage speculation in Wall Street and Real Estate. Govt should just enforce strict laws and let private sector build more infrastructure (energy, health care, telecommunications) by increasing spending and lowering taxes. This will give innovators a framework to take more risk and invent new industries.