Friday, November 21, 2008

Real Rates and Future Growth

Using the Fed series for corporate rates, less y/y CPI (not necessarily the best, but the easiest), I have a somewhat different picture than PK has for real rates.

In fact, it is sufficiently different that one can question the read that these levels are due to a factoring in of a collapse of the system. Rather, they look a lot more like the "Greenspan conundrum" has been canceled, and the US is, back to where it used to be, in terms of having to price up for capital? On the other hand, the spread has never been wider, from BAA to AAA, which suggests a high degree of risk aversion and that the rates we are seeing are a consistent with a view of who will survive a collapse or a gross estimate / mis-estimate of what the price of credit should look like in advance of the sharpest downturn, possibly, since the data series was collected.

Chart1. Estimated real rates thru 11/19/08., US Corporate Sector (spread shown on RHS axis)

Here is a look at what has happened this year, so one can judge the timing of the rate rise and how much might be attributable to changes in measured inflation not reflected in a fall in nominal rates... (n.b. measured inflation, not inflation expectations, as PK calculated)

Chart 2. Corporate real rates in 2008, with CPI. Spread of BAA to AAA graphed on right axis.
I'll update with the expectational variables, if I have the time...

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