Sunday, January 18, 2009

Not to worry, there are new reasons to worry

So the TED spread is back down below one, which is a good thing. It's a sign of at least some health in the credit markets.

Lest you be tempted by this news into some kind of moment of optimism, though, now comes a new economic indicator I had never heard of before, the TIPS spread, the difference between nominal US bond rates and rates on Treasury Inflation-Protected Securities. And Paul Krugman says it looks bad:
Too low is as bad, or worse, than too high — if expected inflation is low or negative, even a zero interest rate isn’t that good a deal, and the Fed may have a hard time booting us out of a recession.
Well, it's much too low, lower than it's been in years. Krugman says this could point to the possibility of a "Japan-style trap," which could mean we're headed in the direction of an L-shaped recession that never gets better. Happy Sunday!

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