Today the yield on US Treasury 1-year bonds fell to 2.50%. Three months ago, it was above 3.25%. In April, it had actually peaked at 4%. A falling interest rate means that investors are worried about the long-term economic outlook of the United States. Many people have been arguing for months that we must begin reducing the deficit to improve investor confidence; it has gotten to the point where this is conventional wisdom. Except, that’s not why investors are saying they’re worried.
On August 1st, the Wall Street Journal ran this story about why investors were becoming worried. In short, a stalling economic recovery and fears about deflation. In other words, another Great Depression. The investors interviewed in this article were clear that they were only preparing for the worst and that it might not happen. However, today Bloomberg reported that capital spending declined in July. In addition, within the past month the Presidents of the St. Louis and Boston Federal Reserve Banks have both made it clear that they’re worried about deflation; the current inflation rate is only about 1%.
So how do you deal with a stalled economic recovery and potential deflation? read more »