Robert J Samuelson

I meant to read his book, The Great Inflation and Its Aftermath: The Past and Future of American Affluence, but never did get around to it.  I noticed something recently though, and it got me to thinking about this inflation/disinflation scenario that seems to be playing out.  Look at this chart:

Its a chart of the ten year bond yield since the Kennedy Administration.  Notice the upward slope until Reagan becomes president, then the downward slope since.  Clearly, something changed at that time.  One thing that definitely changed was the income tax code.  Other changes were deregulation and free trade.  


My take on this is that both trends are evidence of something wrong.  The former trend depicts an inflationary environment, the latter depicts a disinflationary one (at least at first).  Yields have gotten so low that, with the yield at less than 3%, it is lower than the historical growth rate of the US economy.  Something about that doesn't seem right.  The time value of money should be higher than what it is now.  The time value of money is reflected by the yield on the 10 year bond shown here.  The market is saying the time value of money is now lower than the historical growth rate of the US economy.  If I am not mistaken, this is symptomatic of a problem.


If I were to guess, it may well mean that the market is saying the US economy can't grow anymore.  If I am right about this, then the only way to reverse the trend is to do something to get the economic potential for growth back.  If that doesn't occur, then the bond yields may go down to zero.  That can't be good.