Macroeconomic Case: Yield Rates

ECO 209 - Case Study #5

1. What is so extraordinary about the present low rates of inflation and low rates of interest is that this is the first time Alan Greenspan remembers a period in which all of the developed countries and the major emerging market countries, except Russia and Turkey, where inflation is all single digit and interest rates are all single digit.

2. The era of low rates was brought on by the fall of the Soviet Union, as millions of people shifted out of a centrally planned economy that had no impact on global markets. As Eastern European workers and businesses embraced the rest of the world, they exerted downward pressure on wages as they adjusted to an open economy, Mr. Greenspan said.

3. According to Greenspan, this period of low inflation will come to an end due to the fact that China has masses of workers moving from rural, disconnected areas to cities that are firmly tied to the global economy. Eventually, the markets of Eastern Europe and China will be fully competitive. At that point, the disinflation will start to hit, and probably interest rates will move up and inflation will pick up a bit.

4. For now, though, rates remain low, partly because a surplus of liquidity in global markets is pushing down yields across the board (which means there is too much financial resources waiting to be invested) − not just top-notch corporate bonds, but lower-quality corporate bonds and emerging markets alike.

5. Mr. Greenspan believes that the massive current account deficit of the U.S. is not a huge threat to the international economy because he believes that the world's capital markets are so liquid these days that even if foreign central banks begin selling off big chunks of their U.S. dollar holdings, we can absorb the adjustment. However, David Dodge espouses a different view. He believes that if investors suddenly