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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: Crimson Ghost who wrote (98371)6/8/2009 2:02:37 AM
From: Perspective2 Recommendations  Read Replies (1) of 116555
 
This is going to be entertaining, at least. One way to think about the yield curve is that it represents the price creditors extract from their borrowers at any given duration. The Fed really only has control over the short end, and by their actions at the short end, they control the balance between the cost paid by those who borrow long to those who borrow short and lend long. They regulate the steepness of the yield curve, which is basically the profitability the bankers extract from the productive economy.

As long as the cost of borrowing long is falling rapidly, the Fed can afford to lower short rates. But when that cost is reversing higher, the Fed must at some point follow the market higher, or risk impoverishing the real economy for the benefit of the banks - killing the goose that lays their golden eggs.

This time around, the Fed would *love* to have as steep a curve as possible to replenish bank balance sheets. However, I don't think the economy can even stand the curve as steep as it is at this moment. And the banks probably can't stand much of an increase in short rates.

This is gonna get interesting real fast. Pass the popcorn, please...

`BC
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