Here’s a bit of datapoint-diversion, post the Federal Open Market Committee’s Tuesday reiteration that US interest rates would remain low for an “extended period” given lingering weakness in the economy.
From an investment outlook by William Browder, founder and chief executive of Hermitage Capital Management, and presented at last month’s LCF Rothschild emerging markets funds conference:
In case you can’t read the fine print, the slide references this 2003 Federal Reserve paper about the effects of budget deficits on interest rates. Put simply, the paper asserts that a one percentage point rise in the projected deficit-to-GDP ratio generates a 20 – 40bps increase in the 10-year bond rate rates.
Of course, that’s purely based on deficit measures, and completely ignores the potential need for loose monetary policy in times of financial stress — something which the world’s central banks have responded to in force via quantitiative easing, as the below Hermitage slide should also show:
And since we’re talking developed country deficits, QE and emerging markets — which tend to be linked to hard commodities — you can probably guess where Browder is going. One more slide:
Full presentation in the Long Room. (Muchos gracias to Eminence Noire)
Related links:
Deficits and debasement - The Economist
The debt-deflation myth, debunked by UBS - FT Alphaville
Could UK money supply collapse post-QE – FT Alphaville
QE experimentation, speech du jour – FT Alphaville